An insurance company can only use its credit-based insurance rating as a factor in its underwriting process. It will be considered along with several other factors that vary depending on the type of insurance. Auto insurance companies often use what's called a “credit-based insurance score” to set rates. These are different from typical credit scores, such as your FICO score.
Credit-based insurance scores assign different weights to factors compared to other scores. It is not possible to define a “good insurance rating” because of the variety of ways in which it can be calculated. Statistically speaking, people with higher credit scores are less likely to file a claim with their insurance company. As such, insurance companies use information from major credit rating agencies to create their own rating system, similar to insurance credit scores.
This rating system is called credit-based insurance scoring. Your insurance rating helps your insurer determine your risk as a policyholder. Because premiums are determined based on risk, your insurance rating may affect the amount you pay for insurance. An insurance score is a three-digit number that insurance companies use to predict the likelihood that a prospective future customer will file a claim.
Insurers take this score into account when determining if they will offer you an insurance policy and how much insurance premiums will pay. Insurance companies often cite a study by the Federal Trade Commission that establishes a correlation between credit and the chances of a driver filing an auto insurance claim. While bad credit is likely to negatively affect your car insurance rates in states where this practice is allowed, you have a few options. Some states prohibit insurers from using consumer credit information: California, Massachusetts and Hawaii for auto insurance and Maryland and Hawaii for homeowners insurance.
Insurance companies use patented algorithms to develop insurance ratings, so each company may have a different way of calculating its rating. If your credit has had a negative impact on your car insurance, such as higher rates, cancellation or non-renewal of the policy, you can ask your insurer to provide you with the name of the credit agency that provided the information. As you'll see below, rate increases for credit problems can vary a lot from company to company, which is why it's so important to compare auto insurance quotes. However, the insurance rating that appears on the Credit Karma website is based on a Transunion model and on Transunion credit data; it is probably not the credit rating calculated and used by your insurance company.
The states that prohibit or restrict the use of credit as a qualifying factor for car insurance are California, Hawaii, Massachusetts and Michigan. You can also improve your insurance rating by driving safely and avoiding the need to file insurance claims. However, not all states allow the use of insurance ratings as a factor in determining auto insurance rates. Whether you're buying insurance for the first time or just want to switch providers to get a better deal, your credit-based insurance rating can affect the price you have to pay for your policy.
Your insurance rating plays a key role in determining if you will be offered a new insurance policy and the rate you will pay. The higher your insurance score, the better the insurer will assess your level of risk in states where insurance scores are a qualifying factor. For example, Oregon currently has some restrictions on credit-based auto insurance ratings.