Does Your Credit Score Affect Your Insurance Rates?

The practice of using your credit score as one of the ways to determine how much you pay for car insurance is controversial, yet it is also nearly unavoidable as you shop for car insurance. In fact, the majority of auto insurance companies—and even some homeowners insurance companies—use credit information as part of the underwriting process (whether or not to issue a policy to you and what they should charge you for it).

What does your credit score have to do with car insurance? Consider that insurance is based on the concept of risk, or, the probability of something bad happening. In addition to your age, gender, driving record and past insurance claims, insurance companies use your credit score as another way to determine how risky you are as a driver. Insurance companies want to predict whether or not you will file claims, and according to the Insurance Information Institute, drivers with low credit scores have been found to file 40% more claims than drivers with good credit scores. Insurance companies assume—based on their experience and some really complicated mathematical calculations—that there is a correlation between individuals that have poor credit and those who file more insurance claims.

While the practice may seem like undue punishment for many drivers whose credit scores may not tell an accurate story about their likelihood to get in a car accident, the relationship between credit scores and insurance rates can yield positive results for many drivers. Most policyholders have good credit, so for many people the use of credit scores may actually help to keep insurance rates low. And remember that your insurance company isn’t using the same type of credit report as a mortgage lender. Instead of looking at your ability to repay a debt, insurance companies are more interested in the likelihood of incurring future insurance losses, as indicated by things like late payments, outstanding debt, bankruptcies and new applications for credit.

Ninety-seven percent of insurance companies use credit scores as a means for determining premiums, but some states have banned the practice. Unfortunately, unless you live in California, Massachusetts or Hawaii, you are out of luck! It is always a good idea to be aware of what your credit score is and take steps to improve it should it fall below acceptable levels. If you are concerned about your credit score affecting your insurance rates, call us to talk about your situation. We offer auto insurance policies from numerous insurance companies and we can obtain multiple quotes to make sure you are getting the best coverage and value for your budget.

What are your concerns about the role of credit scores in determining insurance rates? We can help answer your questions, today.


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