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April 22
How Insurers Determine The Cost Of Your Auto Insurance

How Insurers Determine The Cost Of Your Auto Insurance

If you are new driver who is trying to find a lower auto insurance rate, you might be wondering what auto insurance companies look for in order to give you the lowest rate. There are a variety of factors that can influence your auto insurance rates.

There are certain types of information that auto insurance companies use to calculate your premium and provide a quote. You probably are not aware that you have an insurance score and that this is the score used by most insurers to provide you with a monthly premium rate. It is a mystery to the layperson and this article is going to explain as much as possible to you.

The Insurance Score

Insurers use insurance scores to forecast the likelihood of a customer to file an insurance claim. Each insurer uses their own system to analyze the customer’s credit rating. Many insurance companies use a branded formula to compute the scores, but in each case, estimating the scores would include some or all of these factors:

  • Debt payment history
  • Outstanding debts
  • How long customer has had a credit history
  • Number of revolving credit
  • Credit balance
  • Types of loans

In contrast to a credit rating where your income is used to decide if you can repay a debt or not, insurers do not use your income as a factor in determining your insurance score. What this means is that omitting your income will possibly penalize you for assuming a large loan or putting a huge charge on your credit cards because the insurer does not care if your income is more than your monthly expenses.

The Nuances

Insurers defend the use of using insurance scores by alluding to the fact that studies have proven a strong parallel between insurance claims and credit scores. Insurers draw on the assumption that someone with poor credit rating who has had a minor traffic accident would be more than likely to file an insurance claim. One of the reasons is possibly because they don’t have the funds to get the repair done.

From a business standpoint, insurance scoring has proven to be profitable for insurers, since almost no one qualifies for the lowest rates. Think about it. The monthly recurring premiums that consumers pay to the insurer continue to be a good source of revenue for them and insurance scores help to validate the higher premiums.

To the insurer, a flawless insurance score would characterize a client with the lowest potential risk of filing an insurance claim. It can be concluded that since the likelihood of filing an insurance claim is centered on having a good credit rating, it is then important to maintain a high score. If you have good credit and a perfect driving record, you can actually have a lower insurance premium than a driver with a perfect driving record, but bad credit. However, you should bear in mind also that the insurer does not only use an insurance score to determine your premium. There are other factors involved that you could ask your insurer to explain.

It is safe to say that paying your bills on time, keeping down your credit card balances and driving carefully will improve your insurance score.

Gathering Information

The insurance companies gather specific information about you to make their decision on whether to give you a lower rate or not. Some of these include:

  • Your gender and age
  • Vehicle make and model
  • Social security number
  • Credit score
  • Credit history
  • Driving record
  • Estimated amount of mileage you drive each week
  • Zip code
  • Your lifestyle
  • Homeowner or renter
  • Occupation
  • Level of education
  • Number of children

The Relevancy

Although, much of this information does not seem relevant to an insurance rate, the insurer has their reasons for using this to decide which category you fall into when it comes to risk factor. For example, a 16 year old teenage boy driving a sports car is considered a high risk because of age, gender and the fast car that he is driving. In contrast, a 40 year old male who may be driving a similar sports car and has an established credit rating would be in a different position.

The exact formula used by insurance companies is a closely guarded secret that consumers are not privy to. However, your personal financial status does play an integral part in their decision to offer you the lowest rate. You become a risk to the insurer if you have a mortgage lien; have filed bankruptcy and if you are a renter and not a homeowner.


Many consumers are alarmed of the fact that insurance companies put so much emphasis on a person’s credit history to decide their monthly premiums. This is especially true for people who have never filed an insurance claim and have yet to qualify for the lowest premium. Unfortunately for them, insurers across the United States continue to practice the use of scoring to calculate your premium. It would be wise, then, to take similar precaution with your credit score as you would do with safe driving. If you are responsible with your credit rating and driving, you could save considerable amounts of money on your insurance premium.

Although, you cannot change many of the things that insurers look for in deciding your auto insurance rate, you should take the necessary steps that are in your control. You should make sure that your credit rating and driving record is good and that you avoid the things that would allow you to be prone to being considered a risk factor.