Does your credit impact car insurance rates? You bet it does. A recent survey confirmed that more than 90% of insurance companies use credit report data as a factor when underwriting new policies. Auto insurance companies use financial history along with other factors (such as years of driving experience, type of vehicle and primary locations) to attempt to assess the potential risk of a driver. Apparently, several studies have shown a strong correlation between a consumer’s financial history and potential insurance claims. Basically, insurance companies feel that if you are responsible with your money, then you are more than likely to be responsible on the road.
Do insurance companies use your actual credit score?
No, they use what it called an “insurance score.” An “insurance score” is not the same as traditional financial credit scores. Theoretically, an “insurance score” is supposed to help determine the likelihood that a consumer will file an insurance claim in the future. A financial credit score is based on the consumer’s likelihood of defaulting on credit terms. There are many different financial scoring models in use today, with the most popular still being the FICO score.
While the insurance scoring models are generally deemed as proprietary, it is generally believed that the models rely on some if not all of the following: length of credit history, late payments, new applications for credit, types of credit used, payment patterns, available credit, public records, and past-due amounts. Of course, most financial scoring models are based on similar if not the same criteria. Regardless of how the scores are calculated, the same general data is being used to calculate both your insurance score and your financial credit scores.
So what is the problem?
According to insurance companies (and the bureaus that make money selling this data to the insurance industry), there is no problem. The use of insurance scores helps assess the true risk of a consumer, and as a result, premiums are more accurate. In short, drivers with better credit are rewarded with lower premiums. Those drivers with lower credit scores pose a greater threat for filing claims, so they pay higher premiums. How much higher? Some insurance companies charge customers with poor credit as much as three times the rate for customers with excellent credit. This is a great example of why credit repair is an absolute must for some. Can you really afford to pay three hundred percent more for auto insurance because your credit report reflects incorrect or incomplete information?
While struggling to pay for basic necessities such as food, shelter and medical, some consumers may miss a few payments, which will have a negative impact on their credit scores. And even worse, credit reports notoriously have errors. Up to 80% of credit reports have errors, and these errors cause consumers billions of dollars of year in unnecessary expenses, such as increased insurance premiums. If credit reporting has become more accurate as some recent studies infer, we have yet to see it.
There is a vicious cycle in our country where consumers are penalized with higher costs when they have less than perfect credit. In turn, the higher costs make it more likely that a consumer that is already having credit issues will have difficulty making payments, and therefore have more credit issues. Costs increase more, and the likelihood of default increases more. This pattern is well documented in the credit card industry where some balances spiral out of control when interest rates increase and excessive penalties are applied after a missed payment.
For most, if it difficult if not impossible to maintain full time employment without access to transportation. Not all places have sufficient public transportation as an option. When services that can be argued as necessity join the vicious credit cycle, the likelihood that consumers that are falling behind will fall further behind increases significantly.
Help break the cycle – don’t overpay for auto insurance.
One thing you can do – repair your credit so you are not overpaying for necessities like auto insurance.