Car Insurance and Your Credit Score

Your credit score has a direct effect on whether you are able to get car insurance and how much your monthly premium will be. Insurance companies use a numerical formula known as an insurance credit score. This score is calculated by a set formula. It takes your credit score, and other factors and shakes them up to create an insurance score.

This insurance score, according to various actuarial studies is a reflection on how likely you will be in an accident. The insurance premiums you pay are adjusted accordingly. Your insurance premiums will be lower if you have a higher credit score. This formula is very similar the one banks use to process credit card or loans applications.

The New Policy:

As with all businesses that make a profit from taking on risk, insurance companies must manage this risk as best they can. They searched for reliable methods to assess a driver’s ability to file claims. An actuarial consulting company conducted a study and found a 99% correlation between insurance claims filed and insurance credit scores. Insurance companies can use insurance credit scores to determine coverage and rate premium decisions. This helps them to set rates that are as close to the risk they take by insuring a particular driver.

MVR reports are known for not mentioning driving tickets/citations that were settled in court. They do not accurately reflect a person’s driving record. The indicator of claim filing potential is the insurance credit score.

How is the Insurance Score Calculated?

The formula used to calculate your insurance credit score is similar to the one banks use when they extend credit. Fair Isaacs Company develops insurance scores. They are based on between 15 and 30 credit characteristics. Each credit characteristic has a different weight. Each file is assigned a score from 100 to 999. The lower the score, it indicates greater risk. Credit activity from the previous twelve months usually gets the highest weight.

Your payment history, debts and length of credit history are all integral parts of the 15-30 characteristics. Personal data such as an individual’s race, religion, marital status, handicaps or income, is not allowed to be used in calculating their insurance credit score.

What if I have a good driving record but have missed a few payments on my credit accounts?

This question has a somewhat unfavorable answer. It is more likely that you will pay higher premiums if your driving record is not impeccable, but you have never been in an accident. Because underwriters believe that credit scores are an indicator of fiscal responsibility. If you are more fiscally responsible, you will be a safer driver. Responsible drivers are less likely to be sued and have lower premiums.

What if I don’t have any credit history?

Your insurance file can be referred to as either a “no-hitter”, or a file that is “thin”. Federal regulations stipulate that you cannot have your credit score count against your application to auto insurance. When making an underwriting decision, the insurance company must consider your file as a neutral risk or average risk.

I have bad credit and need auto insurance. What should I do?

All types of credit are available in the market. Insurance is no exception. Although you will likely pay a higher rate or substantially higher than usual, most people should still be able to get insurance. You should shop around to find the best rate for you financial situation, no matter what.

I have good credit. How can I make sure I get the best rate for my score?

Based on the Fair Isaacs characteristics they use, auto insurers have different risk scoring calculations. It is possible for different companies to assign different insurance risk scores. Forum shopping is recommended if you have good to average credit. Your credit beacon score will not be affected by insurance inquiries made under legal mandate.

What else should I know?

It is possible in certain states to assess the credit history of current customers and adjust rates accordingly. If you live in a state that allows it, this is a good idea.

Hawaii, New Jersey and California have adopted regulations prohibiting auto insurance companies from calculating customers’ premiums based upon their credit scores.

They must inform you if an insurance company uses your credit information to underwrite and ratemaking. If they reject your application for any reason, you have the right to one of those “Hey, we denied you, but you can still get your free credit report” letters.

Be aware that an insurance company’s underwriting department cannot deny or raise your rates based on any of these factors: lack of credit history; number credit inquiries; purchase or construction of a vehicle that increases your debt; use of a specific type of credit card, debit or charge card (such dept. store credit card or gas credit card

To get the best auto insurance rates, good credit is vital. Insurance rates are no longer primarily determined by your driving record. Your financial situation is now the foundation.