Insurance Score: How Insurance Providers Use Your Credit Score

What if I told you that insurance companies aren’t totally open about their pricing methods? That would suck, right? But you know what would suck even more? If debt-free people sometimes pay higher rates simply because they don’t have a credit score. Yikes.

Well, here’s the bad news: those ifs aren’t ifs—they’re cold, hard, frustrating facts. Sadly, many insurance providers (especially auto, but also homeowners and other types) have their own systems—called insurance scores—to rate how risky you are. And while they don’t share a lot of details about how the scores work, we do know your debt load is part of the calculation. Since insurance providers use those ratings to decide how much to charge you for coverage, the even worse news is having no debt can actually drive your premium up! What the heck. You’d hope that living debt-free would make you a safer bet for insurance companies. But because insurance scores are partly based on how well you roll with debt, a missing debt history could spike your rates.

Now here’s some good news. You do not have to open up three credit cards or lease a boat to get affordable auto coverage. Not only do you not have to, but you also shouldn’t do any of those things. You can be debt-free and save on those premiums, and I’ll share tips for how to do that. But first let’s go over what insurance scores are, and how they work.

What Is an Insurance Score?

An insurance score is a rating providers use to decide how risky you are for coverage and how much your premiums should be. (I’m mainly talking about auto insurance today, but scores can affect other coverages as well.) The higher your score, the lower your premium—and vice versa!

Now, your insurance score is not the only factor carriers use to set your premium—good looks, charm and intelligence also come into play. (Kidding! If that were true, I’d be self-insured by now.) But you know what? Your insurance score does play a huge role, and you need to know where they’re getting this number.

So how do they score you? (Spoiler: It has nothing to do with beauty or brains.)

How Is an Insurance Score Calculated?

When you apply for auto insurance, insurers use data from the credit rating bureaus to create your insurance score. I know. And let it be known: I hate the fact that a long credit history and a giant debt load might lead to price breaks—and I really hate that people who’ve worked hard to get and live debt-free and have no credit score sometimes get the short end of the insurance stick on pricing. But hey! In a debt-based economy like ours, mind-bogglingly dumb stuff like this happens. But don’t give up hope—I’ve got tips below to help you get around it.

Meantime, how exactly do the insurers use your credit reports to build your score? Here’s where it gets a little murky. The exact steps vary, and many companies don’t share many details. That’s because they often calculate your insurance score using something called a proprietary algorithm. If that sounds like a dance craze from your grandparents’ day, let me reel you back in. (For the record, I love me an old timey dance craze.)

A proprietary algorithm is a unique formula the insurance company owns, and they’re not willing to share it with the public. Their proprietary lips may be legally sealed, but I’ve still got a basic understanding of what they’re looking at:

• Payment history: I’m talking about whether you make payments on time or tend to run behind. This one gets a lot of weight, because providers see it as a strong predictor of how much (and how punctually) you can pay premiums. Fair enough.
• Outstanding debt: Here’s where the insurance scores really tick me off. There’s no way to know for sure what a company will do with a report about your debt load. But if you’re debt-free (and I sure hope you are), it’s possible they’ll interpret the fact that you don’t have any debt as a sign that you’re a risk for auto insurance. Remember, we’ll walk through the ways to get your premium as low as possible. But whatever you do, don’t use a jacked-up insurance score as an excuse to take out debt. That would only make your whole situation even worse.
• Length of credit history: If I had my way, companies would think twice (or thrice) about insuring people who’ve been in debt for decades, and they’d instead rush to insure someone who’s never had debt. But that’s the opposite of what really happens. The truth is that insurers rate you higher if you’ve been plying the plastic, and lower if you’ve never borrowed. And to that I say, “Bah humbug.”
• Recent applications: Finally I found something I like about insurance scores! Just like me, the insurers believe that when someone is suddenly signing up for all the money they can borrow, they’re doing something really risky. That kind of thing will lower your insurance score, and rightly so. On the other hand, holding off on new debt helps you here, and will likely lower your premium.

Do Credit Scores Affect Car Insurance?

Credit scores do influence your auto insurance premiums. But they’re not the only factor. Like I said before, there are layers to how credit scores impact your payment—and they’re not all bad! The insurance score is key here—and it’s not even the only way insurers figure out your rates.

In addition to your auto insurance score, let me call out a few more layers in this credit tiramisu.

Insurers in most states also consider:

1. Your age: Boomers get the goldmine, Gen Z gets the . . . (mine) shaft. In other words, more experienced drivers are less risky than younger drivers with fewer miles under their belts.
2. Your location: High-population areas have more drivers and higher costs, rural areas tend to see lower premiums.
3. Your history of claims: The more accidents you’ve had, the more you’ll be paying—at least for a while! But remember that over time, you can request companies to forgive past accidents (basically dropping them off your record). Asking can’t hurt, and it might just help!

Are Insurance Scores Important?

Insurance scores play a role in setting your premiums for both auto and homeowners coverage. And your score could mean saving (or paying) a lot of money. For that reason alone, I’ll concede that insurance scores matter. Then again, there’s a lot more to life than decoding some mystery method hidden in the vaults of the insurance companies just to save a few bucks.

How People Without Credit Scores Can Save on Auto Insurance

So maybe you’re like me: you’re blessed to be debt-free, or you have zero plans to borrow any money ever again. As a result, you’re sitting pretty—with a nonexistent credit history. Trouble is, that gap in your debt resumé is making you look risky to the clueless holders of the top-secret insurance score formula.

Cheer up, guys! Insurance scores can’t keep you from a good price on auto insurance. I speak from personal experience here. Instead of griping about how hard it is to keep up with the algorithm, I say we get to steppin’ with some nifty moves (like grandpa used to do) that will help us lower our rates without borrowing a dime. Here’s what we do.

Pay your bills on time.

You’re probably already doing this. But if not, it’s time to get going. Like I said earlier, debt isn’t the only factor in how carriers calculate your insurance score—and timely payments carry more weight than the debt nonsense. If avoiding late penalties isn’t motive enough, getting a break on your car insurance should inspire you to pay your bills on time.

Bundle auto insurance with homeowners.

Way up top, I talked for a hot minute about auto and homeowners—because insurers usually use insurance scores for both of those coverages. Guess what else those two policies have in common? That’s right—discounts! You can probably save 15–20% each year on your insurance premiums just by bundling auto and homeowners insurance. Score!

Raise your deductible.

This is a classic Ramsey play. Get that deductible up, and that premium down! The higher the D, the lower the P. A beautiful inverse relationship. Once you’ve got a full emergency fund in place and you’ve mastered the fine art of budgeting, there’s no reason to run around with a low deductible. Raise it up a notch, watch those premiums sink, and live in the peace of knowing you can cover your share of any accidents with that big ol’ emergency fund.

Shop with RamseyTrusted.

No matter what the insurance scorers say or do, your goal is to find your car insurance sweet spot—which means the right amount of coverage at the best available price. The best way to do this is by working with an independent insurance agent who’s part of our Endorsed Local Providers (ELP) program. These insurance pros are RamseyTrusted and can look at your unique situation to find you the best protection at the right price. They can answer your questions and even run the numbers for you to get you the best deal. They’ve taken care of my family for years, and I know they’ll take good care of you.

Connect with an ELP today!