How Your Credit Score Impacts Your Car Insurance Rates

Your car insurance rates are determined by many different factors.

You know the obvious ones, of course: the make, model and year of your vehicle, your driving record, and where you live.

What you may not know, however, is that in most states insurance companies actually use another method to determine your car insurance rates, and it?s one that doesn?t at first even seem to be related to your driving risk.

We?re talking, of course, about your credit score.

Your credit history and risk

The insurance companies have, over the past several years, argued that your credit history reflects the amount of risk that you pose to an insurer. The basic premise is this: if you have trouble paying your bills, you?re also likely to be a more risky driver.
According to the insurance companies, your credit report is a sign of risk. Essentially, they argue that if you are financially irresponsible it?s likely that you?re irresponsible in other ways. You?re more likely to file an insurance claim if you have poor credit, according to insurance company research.

Not always the case

Consumer advocacy groups disagree, of course. They argue that, especially during tough economic times, credit history isn?t necessarily a predictor of long-term irresponsible behavior. A person who loses their job and has to let a house go back to the bank or even declare bankruptcy, for example, isn?t necessarily someone with a long-term pattern of reckless behavior.
The practice of using your credit history in determining your insurance premiums has been somewhat controversial. In fact, some states have sought to ban the practice outright.

It depends where you live

At this point, most states allow the use of credit history as a factor (one factor among many) in determining your insurance rates. Only Hawaii has, up to this point, banned the practice.
Some other states have put limits on how insurers can use your credit history. Many states more have faced legislation on the issue, only to have it not pass.

What you need to do

If you?re concerned that you?re not getting the best possible car insurance rates because of your credit score, there are some steps you can take:

• Talk to your insurer. When you?re applying for insurance, find out what factors are used in determining your rates. Most of the time insurance companies won?t tell you how each factor is weighted, but they may be willing to tell you whether or not your credit history is taken into account. Some insurance companies, for example, are only concerned about major credit events like a foreclosure or a bankruptcy.
• Learn about your state?s regulations. It could be that your state is considering legislation that would make it easier for consumers with bruised credit histories to get car insurance, or similar legislation. Contact your state lawmakers about changes you?d like to see.
• Regularly monitor your credit report. While insurance companies typically use a composite ?insurance score? in factoring your premiums, that score comes from your full credit report. Each year you can get a free copy of your credit report from the three major credit bureaus from the AnnualCreditReport.com website. If there are errors, follow the credit reporting agency?s procedures for challenging and fixing that error.
• Know what it takes to improve your credit history. Do some self-education about how your credit history is developed, and what goes into it. For example, those major credit events such as foreclosures and bankruptcies do disappear from your history after a while. Learn about what goes into your standard credit score, and you?ll find that some things may matter that you weren?t aware of ? such as the overall credit limit you have compared to how much you?re using.
• Consider an insurance company that doesn?t factor in credit history. In every state, there are usually at least a few insurers that don?t use credit history as a factor in insurance premiums. To be sure, they may have higher premiums to begin with, but if you do some shopping around you?ll probably be able to find someone willing to offer you a deal.
• Know the other factors that influence your insurance e premiums. Credit history can be a major factor, but it?s not the only one. The make, model, and age of your vehicle still will set the range for your premiums, so consider looking into a vehicle with lower premiums if you?re concerned about how your credit will affect your rates.

You can?t prevent an insurance company from using your credit history as a factor in your premiums, but you can minimize the impact it has by following these tips.

Nick Simpson is Social Media Coordinator at Fred Loya Insurance. Fred Loya provides general car insurance as well as unique services catered specifically to customers in multiple states. Car insurance in Colorado and auto insurance in California are two areas where they have excelled in recent years.

Image Credit: RBerteig

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Tagged as: car insurance, consumer advocacy, Credit bureau, credit history, Credit rating, credit report, credit score, insurance, Vehicle insurance

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