Underwriters determine auto insurance premiums using factors such as the driver’s age, driving history, education level, domestic status and even credit score.
Among the factors taken into account to determine premiums, credit score is the most controversial, and can force customers to pay hundreds of dollars more in auto insurance premiums each year.
Controversy aside, insurance companies have solid data to defend their use of credit scores. While insurers have been using credit scores to determine premiums since the mid-1990s, the Federal Trade Commission found in 2007 that credit scores are in fact an accurate predictor of the likelihood of filing a claim.
Here are a few your credit score affects your auto insurance rates.
What the statistics say
Determining risk, and therefore insurance premiums, is all about statistics. Statistics have shown that people with lower credit scores, typically under 600, are more likely to cost the insurer money.
People with lower credit scores tend to file more claims, inflate their claims, and even have a higher rate of committing insurance fraud.
Due to the controversial nature of using credit scores to determine insurance premiums, the states of Massachusetts, Hawaii and California make it illegal for insurers to use credit score as a way to determine insurance premiums.
The credit factors that matter
Insurers won’t look at your credit score in the same way a bank would when you’re applying for a loan. Auto insurers don’t only look at the score, but also adverse events, like a major delinquency or a bankruptcy. These types of events indicate risk, which is the last thing an insurance company wants.
Most insurers have their own methods to determine how your credit score will affect your rates. Favorable factors include things like a long-established credit history, open accounts in good standing, and no late payments or past due accounts. Factors that could raise insurance rates include accounts in collection, high amounts of debt, a short credit history or a history of late payments.
Policy payments
Your credit score also could affect how the insurance company will allow you to pay for your policy.
Since consumers with lower credit scores are technically more likely to miss a payment, insurers may ask those with low credit scores to pay a greater portion of the premium upfront. For especially low credit scores, customers could be required to pay 6 or even 12 months of premiums before the policy is issued.
To speak with an expert about your insurance rates, contact an agent at John B. Wright Insurance.
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