How Your Credit Score Affects Your Car Insurance Rates

Many people mistakenly believe that their credit scores only affect their ability to get loans on houses and cars as well as get access to credit cards. While a credit score definitely impacts all of these things, it can also negatively influence the individual in other painful ways. For one thing, car insurance rates are determined in large part as a result of individuals’ education levels, occupations, and especially credit scores. This is because the car insurance companies decide how risky drivers will actually be as a result of their credit history.

Credit History and Its Impact on Car Insurance

It may seem hard to believe, but when car insurance companies were recently surveyed regarding credit scores and insurance rates, they admitted to a startling statistic. In excess of ninety percent of all of the car insurance firms, ninety-two percent in fact, utilize their clients’ and prospective clients’ credit information in their evaluation of all insurance policies that they both extend and even renew. This shocking statistic was discovered in a survey conducted by research firm Conning and Company.

Auto insurance companies actually do this using what is called an insurance risk score. These insurance risk scores are based on the traditional credit scoring system. Car insurance firms will quite literally consult this industry proprietary score in their deciding whether or not they should offer a person their car insurance policy. They also use this controversial model and method to determine what the chances are of such a customer filing an insurance claim with them.

Credit History and Existing Car Insurance Policies

For people who already possess car insurance, they are not free of these potential problems that arise as a result of credit either. An individual’s present car insurance provider will similarly review his or her credit score and history, along with these insurance risk scores, in order to decide if a reason exists to inflate the customer’s existing insurance rates.

The Way that a Credit Score Impacts Individuals’ Insurance Risk Score

A person’s FICO, or credit score, is really the only one that matters where the insurers are concerned. The person can be certain that when he or she is applying for car insurance, the insurer will request permission to look over his or her credit score from either one or all three of the credit reporting bureaus, Experian, Equifax, and Transunion. Although such an inquiry will show up on the credit report, it probably will not impact the person’s actual credit score.

The person’s prospective car insurance issuer will then take this credit score and work it into their proprietary model calculations. The resulting number that comes out will be the insurance risk score. A higher credit score will certainly lead to a higher insurance risk score. Should the person’s credit score prove to be less than a fairly high 650, then the car insurance firms will want to raise this individual’s insurance rates. They might also opt to deny the individual car insurance coverage, as unfair as this seems.

What Credit Scores and History Say About Peoples’ Insurance Risk Factor

The insurance companies are sophisticated and slick. They utilize studies that demonstrate to them a direct relationship in linking credit scores, or histories, and the filing of insurance claims. Their rationale follows a logical thought progression.

The insurance company thinking goes something like this. A person with a higher credit score, hence a better credit history, likely maintains a healthier financial lifestyle. They claim that because a credit score is a reflection of an individual’s sense of responsibility, then the person in question with higher credit scores is likely not under financial strain. This gives them statistically lower odds of driving in manners that lead to an accident and the resulting filing of an insurance claim.

Similarly, where the insurance companies are concerned, the reverse argument is true as well. People who have credit troubles, leading to a lower overall credit score, are likely to be less responsible individuals. They might be undergoing financial strain too. As a result of this, the insurance companies say that their behind the wheel behavior will prove to be riskier.

The Vicious Cycle Created by Insurance Companies

Insurance companies’ assumptions could be totally wrong. Intelligent people might make the case that credit histories have nothing to do with the quality of driving whatsoever. Other experts have argued that these resulting higher car insurance monthly premiums are only making a person’s financial problems that much worse. In this way, the car insurance companies are actually creating and increasing stress for the insured customers, potentially only adding to such risky behavior while on the road.

State lawmakers have acknowledged and supported this point of view. Aiding them in the fight against unreasonable insurance companies are consumer advocates and state insurance regulators. The battle goes on and on.

How Much A Poor Credit Score Can Raise Insurance Premiums

There have been ongoing debates about how much poor credit scores should affect a person’s car insurance rates that they have to pay. There is no universal standard for how much the penalty turns out to be. Still, insurance companies admit that for a poor credit client who has never been in an accident or even filed a claim with them, they could pay as much as three times more for the same insurance coverage as a good credit customer with similar circumstances and the same vehicle might be required to pay. This is all because of differences in the two peoples’ credit scores.

Allstate, among other insurance companies, has admitted to charging poor credit customers these exorbitant insurance premiums of three times the rate of those with wonderful credit. The fact is this. Credit history is now becoming if not the greatest factor, than among the biggest factors, in deciding how much a person’s car insurance rate will be.

The major insurance companies justify it in this way. Those who boast phenomenal credit are being rewarded with a good driver discount. Those who have poor credit are alternatively being punished with a poor driver penalty. The people in the middle, with around average credit, will then pay average car insurance premiums. They are quick to point out that those individuals who work their way up to a fantastic credit score will then similarly achieve a lower car insurance premium than they had before the good credit rating was attained.

Means of Improving A Person’s Insurance Risk Score

There are a variety of things that concerned car drivers might do to improve their insurance risk score. One of these is to maintain a perfect or near perfect record of driving. The other action would be to improve their credit histories and resulting credit scores.

Healthy financial lifestyles lead to higher credit scores. Higher credit scores can be achieved by watching out for two principal areas where credit is concerned. The first practice lies in paying the bills in a timely manner. This is reported monthly by most every credit card issuer to the three credit bureaus. The second good practice is to strongly avoid any kinds of negative information that might be sent in to the credit bureaus, including bankruptcies and activities from collection agencies.

Good credit scores tell those inquiring that a person has managed his finances extremely well. In particular, they show that the debt levels are not especially high and that existing credit cards and lines of credit are carefully managed and maintained. They also reveal that the individual has not excessively applied for or opened up new credit facilities in the recent past.

One Response to “How Your Credit Score Affects Your Car Insurance Rates”

  1. I think insurance companies using FICA scores to inflate premiums and deny coverage is going to come back to bite them if they don’t loosen up and use a more reasonable approach with their inclusion of FICA scores in their decision making. After all, they already have the option of canceling the coverage for non-payment or if there’s questionable or too many claims, etc. How can you justify charging 4 times the normal premium because someone ‘Might’ not make their payment or they ‘Might’ be a higher risk of an accident claim? That’s what insurance is..its a risk that insurance companies are guaranteeing the odds in their favor, and unfairly making safe drivers that don’t file claims pay for the sins of those that do. Most Americans with low FICA scores these days are there because of mismanagement of industry causing a ripple effect in various ways that cause financial strain which leads to their lower than impressive FICA score. The insurance industry in my opinion, will soon find themselves in a revolt from consumers and lawmakers are going to have to take an active role to force industry’s hand just like they’ve had to do with the mortgage and banking industry. In most cases it can only be classified as discrimination without an even remotely justifiable reason for inflating the premium as it relates to that consumer’s driving history.

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