Financial Responsibility Scores

Many states now allow insurance companies to utilize a person’s “financial responsibility score” as a rate determining factor. This is based on your credit score with the idea being that if you don’t have control over your finances, you may be more reckless on the road. This doesn’t affect your drivers license status unless you choose not to carry auto insurance while driving. But it can have significant financial implications.

Check with your specific state Department of Insurance to determine if your state allows this somewhat controversial practice.

Why do insurance companies look at your finances?

The idea of using financial responsibility scores to determine insurance rates is hotly contested. On one hand, there is data to back it up, and drivers with a poor credit score are also more likely to forget to pay creating higher administrative costs. On the other, the connection between your finances and driving seems abstract.

But insurance companies and independent research companies have completed studies that prove there is a strong correlation between your credit score and the possibility you will file a claim during your insurance policy.

Basically, the lower your credit score, the higher the odds your insurance company will have to pay out money for a claim you will file.

PLEASE NOTE: These studies DO NOT state that there is a correlation between your credit score and the possibility of you having a car accident or suffering property damage, just the possibility of you filing a claim!

The thought process is that those who manage their money better will often pay for smaller amounts of damage out of their own pocket, rather than file a claim. There are some who also believe those with low credit scores may not drive as carefully, but the data doesn’t necessarily support this.

Others, including state legislators and insurance agents believe insurance companies are violating our rights by using a financial responsibility score to determine your rate. In many ways, this makes it harder for some of the most economically vulnerable to access motor vehicle insurance. Therefore, it makes it harder for them to be able to afford to drive. If the most financially vulnerable drivers can only afford liability insurance, it leaves them at risk of more financial issues after even a small accident. Unfortunately, this happens all too often, which is part of why some lawmakers want to outlaw the practice.

Either way, it’s important to understand that the higher your financial responsibility score (credit score), the lower your insurance rate and vice versa.

As you would probably expect, those with higher credit scores typically support the use of such measures in determining insurance rates.

However, it is illegal to use credit scoring in determining car insurance rates in California.

What exactly is my insurance score?

That’s for the insurance company to know and you to find out! Each insurer calculates an insurance score differently. You can look at your credit score on apps like Credit Karma to get a basic idea, but there’s no guarantee they’ll match exactly. Only time will tell. But the longer you have your driver license without a claim, the more compensating factors you have that will lower your rate. If, on the other hand, you require things like financial responsibility insurance, your insurance score is not a critical factor. It’s just one more thing making proof of insurance more expensive.

What’s more interesting is that the algorithm (fancy word for multiplying a string of numbers together) is considered proprietary and not made available to the public.

Insurers do not have a standardized scoring model, such as your FICO score, between 300 and 850.

You may be assigned an insurance score of A through Z, A through F, “1B,” “2r,” “Preferred 49” or even a “1678JHTY490.”

No matter what arbitrary alpha numeric code you are assigned, it all means nearly the same thing.

What if I don’t have any credit history?

Those with little or no credit history fall into the “no hit” or “light hit” range. Keep in mind, an insurance carrier may look at things on your financial record that are not necessarily front and center on your credit report. These and other factors set your motor vehicle liability insurance, collision coverage, and much more.

Depending on which company you purchase your insurance from, this may be better than having bad credit.

Typically, a “light” or “no” hit lands you in the middle range of available scores. It is not held against you, but also doesn’t do you any favors.

Some individuals would actually benefit by not having their score returned if it was poor. They may enjoy either a slight discount or at the least no surcharge for their credit history.

How do insurers obtain my score?

The best way to ensure your score is “pulled” accurately is to provide your social security number to your insurance agent or insurer. This will ensure the score returned is actually yours.

It is not necessary to provide your social security number to have your score retrieved however.

Many companies subscribe to a service that can locate your financial responsibility score using other individual data points collected about you through various services.

For example, your current address (if you have lived there at least one year typically) or previous address and your driver’s license number may also be used to track down your insurance score.

Let’s look at an example:

Prior to Bob and Stacy’s state allowing insurance companies to use financial responsibility scores to determine rates, they both paid $1,200 per year for their automobile insurance.

Both have similar driving records and similar vehicles, but Bob has a better credit score than Stacy.

After their insurance company adopted the use of credit scoring to determine rates, Bob now pays $1,050 for his policy and Stacy’s policy increased to $1,350.

It is important to note that even in states where insurance companies are allowed to use financial responsibility scores, some companies choose not to use them.

So if you don’t have a great credit score, you may not necessarily pay a higher rate. However, non-credit scored insurance rates are generally slightly higher than insurance scored rates, assuming you have good credit.

Contact your insurance company or independent agent to determine if your financial responsibility score was used to calculate your insurance rate.

Legally, you should have been notified of this prior to the completion of your insurance quote.