How your credit history can change your car insurance price

What an insurance score is, and what it isn't

The National Association of Insurance Commissioners (NAIC) describes a credit-based insurance score as a number insurers use "to estimate how likely someone is to file an insurance claim, not how likely they are to repay a loan." It is built from the same credit report a lender sees, such as your payment history, how much you owe and how long you have had credit, but it weighs those items for a different purpose. Credit reports don't list income, race or ethnicity, so the score can't use them directly.

The score is one rating factor among many. Your driving record, claims history, ZIP code, car and the coverage you choose all sit on the same bill. How much weight credit gets depends on the insurer's filed rating plan, which is why two companies can price the same driver with the same credit very differently.

Why insurers use it, and why it is contested

In a 2007 report to Congress, the Federal Trade Commission found that credit-based insurance scores "are effective predictors of risk under automobile policies." The same report found that scores are distributed differently among racial and ethnic groups, which affects what those groups pay on average, while concluding that the scores draw only a small part of their predictive power from that correlation.

Critics, including some regulators, argue that the scores penalize drivers for events that say little about how they drive, such as an illness, a layoff or a divorce. That argument is behind the state bans and the exceptions described below. Insurers answer that a factor which predicts claims keeps prices lower for the drivers least likely to file one.

Where states ban or limit it

In most other states, the NAIC notes, insurers "cannot use these scores as the sole reason to increase rates," and many states require a notice when credit played a role in an adverse decision. Several, Texas among them, let you ask for an exception if a divorce, a temporary job loss, identity theft or a death in the family damaged your credit. The rule for your state, and its regulator, are on your state cost page.

Your rights when credit raises your price

• An adverse action notice. Under the Fair Credit Reporting Act, when information in a consumer report leads an insurer to charge you more, it must tell you, name the credit bureau that supplied the report and tell you how to get a free copy.
• A free copy of the report. You can ask the bureau named in the notice for a free copy within 60 days. Separately, AnnualCreditReport.com gives free weekly reports from Equifax, Experian and TransUnion.
• A dispute. If an item is wrong, dispute it with the bureau, which must investigate. Then ask the insurer to re-run your score.
• An exception, where your state allows one. Put the request in writing and attach documents such as a divorce decree or a layoff notice.

What tends to improve an insurance score

Insurance scoring models are proprietary, and each insurer files its own with its state regulator. They draw on the same credit report categories as lending scores, though, so the habits that help a credit score usually help an insurance score too. None of them work overnight: a score reflects months and years of history, and most insurers look at it again only when the policy renews.

• Pay every account on time. Late payments can stay on a credit report for up to seven years, and recent ones weigh more than old ones.
• Keep card balances low compared with your credit limits, and pay down revolving debt before installment debt when you can.
• Open new accounts only when you need them. A run of new applications and accounts in a short time can count against you.
• Keep older accounts open if they cost nothing: a longer credit history generally helps.
• Fix what is wrong. An account that isn't yours or a debt reported twice can cost you on every insurance quote until it is removed.

If your credit is thin or damaged and your state allows credit in pricing, the other lines of the bill matter even more. A clean record, a higher deductible and the right discounts can offset part of a credit penalty; see ways to save for the options and who qualifies.

What to do about it

1. 1 Pull your three reports from AnnualCreditReport.com and look for accounts that aren't yours, late payments you made on time and debts already paid.
2. 2 Dispute the errors with each bureau that shows them, in writing or online, and keep copies.
3. 3 Ask the insurer to re-rate at renewal, or sooner, once the corrections post. Then compare quotes line by line: insurers weigh credit differently, and some weigh it less.
4. 4 Complain to your state insurance department if an insurer refuses an exception your state requires or used credit as the only reason to drop you.

Questions drivers ask