Your credit score affects your ability to secure various financial products. Good credit scores can get you better credit card rates or more affordable mortgages. On the contrary, a bad credit score can attract higher rental rates or even cause you to miss out on a lucrative job opportunity. Credit scores always sneak into several areas of life, and the insurance industry isn’t exempted. Fortunately, you can save money on auto insurance premiums by addressing your credit score.
Auto insurance companies have established a correlation between creditworthiness and the likelihood of auto insurance claims. Most insurers use a special credit score to work out auto insurance rates, although this is not acceptable in every state (California, Hawaii, and Massachusetts).
How does your credit rating affect the prices of your insurance premiums?
Your credit score is a measure of your creditworthiness — the likelihood that you’ll be able to pay a debt, in this case, premiums. However, insurance companies also evaluate your credit files to predict the odds that you’ll file a claim. If your credit score is not up to their expected standards, they’ll more likely charge you more even if you’ve never had an accident before.
Statistics indicate that single drivers with relatively good credit scores pay $68 to $526 more annually than drivers with the best credit scores. Credit scores actually influence your auto insurance premiums than any other factor. For instance, having a single moving violation in Kansas can increase your premiums by about $122 annually but a good credit score can boost your premiums by about $233. Moreover, a poor credit score can increase your premiums by up to $1,301, on average.
How insurance companies determine credit scores for auto insurance
When working out the credit portion of your insurance score, the following factors are considered:
- Duration of credit history
- Payment history, including late payments and delinquencies
- Types of credit, like loans and credit cards
Factors like gender, age, marital status, income, and ethnicity are, however, not considered when determining auto insurance credit scores.
A credit-based insurance score doesn’t just affect your auto insurance premiums negatively. You can also benefit greatly since insurers quote the fairest, most appropriate premium rate for each customer. In fact, almost half of auto insurance policyholders pay lower premiums based on their impressive credit scores. However, insurance companies don’t look at credit scores in the same way financial institutions do. They only focus on the information that points to potential losses.
What if my poor credit score is caused by an extraordinary life circumstance?
Some insurance companies have an extraordinary life circumstance exception to auto insurance. If your poor credit score is as a result of certain extraordinary circumstances, you may qualify for reconsideration on your premium rate. Some of these circumstances include:
- A catastrophic event declared by the state or federal government
- Dissolution of marriage or divorce
- Total or other loss that renders your home uninhabitable
- Death of a spouse, parent, or child
- Military deployment overseas
- Temporary loss of employment, especially in cases of involuntary unemployment
- Serious illness or injury to you or your immediate family member
Why does your credit rating affect the price of your insurance premiums?
Your insurance company will charge you higher premiums if your credit score screams that you are bad with your finances. Poor credit scores can send the message that you are irresponsible in other areas of life, which increases your insurance liability. As a result, drivers with poor credit scores pay up to 91 percent more in premiums than drivers with excellent credit scores.
Credit scores affect car insurance premiums for two basic reasons. First, a credit score is an indication of whether you will be able to pay premiums. Secondly, insurance companies have drawn a correlation between credit scores and the likelihood of accidents and claims. Although some insurers may not include credit scores in their policy rating system, statistics indicate that drivers with poor credit scores are more likely to file a claim than those with good or excellent scores.
Every auto insurance policy applicant poses some level of risk to the insurance company. For the insurer, the priority is to minimize the risks of filed claims as much as possible. According to a report by the Federal Trade Commission, credit-based insurance scores are useful risk predictors for car insurance policies. However, some states have found the argument controversial hence banning this evaluation method.
Consumers are kept in the dark
Insurance companies are under no obligation to publish the credit scores they’ve crafted for you. In most cases, you have no idea whether your credit score is weighing negatively or positively on your auto insurance premiums. A sudden fall in your score may cause your insurer to raise your premiums or even cancel your policy. However, you’ll only receive an adverse action notice with cryptic information that doesn’t categorically highlight their reasons for the cancellation.
Paying for accidents that haven’t occurred
As a motorist, you basically buy auto insurance to protect yourself financially in case of an accident. When a poor credit score causes you to pay more in premiums, you’ll be digging deeper into your pockets to pay for accidents that have not occurred or may never occur. For example, New York drivers with a good credit score and a clean driving record can pay up to $255 more in premiums annually than a driver with an excellent credit score. The same driver wouldn’t pay an extra coin in states like California, Hawaii, and Massachusetts that prohibit the use of credit scores to determine premiums.
The credit-based pricing dynamic is obviously controversial in most states. In fact, it can artificially encourage the sting of careless driving in major states like New York. If you are involved in an accident in New York, your premiums will take less of a hit since you have already paid for the losses that your “good” credit score had predicted. However, in states like California, a single accident may cause you to pay $1,188 higher in average annual premiums for a single driver. That will serve as a memorable warning to drive more carefully on Californian roads.