Credit Scores And Your Auto Insurance Rates

Auto insurance is essential for both legal compliance and risk management. Not only are you legally required to have a minimum level of coverage; your policy can also protect your assets in the event you're involved in an accident. But, car insurance premiums can often feel like a financial drain. What's more, many consumers are unaware that their policy rates aren't calculated based solely upon their age and driving record. They're surprised to discover that their credit scores can have a dramatic impact on their rates. Below, we'll describe how your credit score can be used to determine how much you'll pay for your auto insurance policy.

The Mystery Of Insurance Scores

When car insurance companies calculate the rates on your policy, they use an actuarial formula that yields your individual insurance score. This formula uses your credit history to determine your score. Unfortunately, it's not as simple as directly translating your FICO score into auto insurance rates. Instead, the formulas use your credit history to establish expectations about the risks associated with extending a policy to you. The rates that are attached to a policy reflect those presumed risks. Because the formulas are proprietary, it's difficult for consumers to determine how large an impact their credit score has on their rates.

Credit Worthiness And Driver Responsibility

The reason that car insurance companies use your credit history to help determine your premiums is because they consider it a good barometer of your responsibility on the road. They feel that people who show a high level of responsibility in managing their personal finances will be similarly responsible while driving. This effectively implies a lower degree of exposure for auto insurance providers. By reviewing policyholders' credit histories and calculating insurance scores, carriers can make reasonable estimations of the risk they assume when offering a policy.

It's important to realize that every car insurance provider views credit worthiness differently. While some carriers will consider it to be more important that past driving history, others will only use it as a minor factor, if at all.

Controversy Over Using Credit Scores

Despite the auto insurance industry's argument that a person's credit score is an accurate reflection of how responsible they'll be on the road, many consumers are critical of the practice. They point out that good drivers often have poor credit scores. They further contend that the ebb and flow of local economies can exert financial pressure on consumers. This pressure can cause trustworthy people to miss paying a few bills occasionally. As such, they feel that any correlation between a person's credit score and the likelihood of responsible driving is unreliable.

Clean Up Your Credit For Lower Rates

The most effective way for consumers to raise their insurance scores (thereby, lowering their auto insurance rates) is to take measures to improve their credit scores. That includes paying bills before they're due. If any accounts are in default, they should be paid or otherwise negotiated with the merchants. Credit card balances should be kept under 50% and no more than 3 cards should be kept active. Finally, review your credit report every year. Mistakes happen. When they do, they can tarnish your credit history. Identify them on your credit report and eliminate them.

While millions of people disagree with the practice of using credit scores to determine auto insurance rates, an increasing number of carriers are doing so. By being proactive in maintaining a clean credit history, you can enjoy lower premiums.