You may be wondering why credit scoring is important to auto insurance rates. If you haven't wondered about it, now is the time to start learning more -- because it could mean that your car insurance rates will go up. Even if you have a perfect driving record, your rates might go up at your next renewal simply based on your credit score alone. Doesn't sound very fair, does it? Read on to find out more.
Traditional Insurance Scoring
In the past, insurance companies looked at the following factors to determine your insurance score, which in turn was used to determine your insurance premiums:
- Marital Status
- Zip Code
- Driving Record
Since insurance companies have statistics on how often men and women of all ages and marital status get into accidents by zip code, they would use this standard information to predict the likelihood that you will get into an accident. And then charge you accordingly. It typically resulted in women paying less than men, and the young paying more than people older than them.
Though it may not have always been fair, it was easy to predict. If you thought your premiums were too high, you could get married, move to a new zip code, or just wait to grow older to lower your monthly payments.
Credit-based scoring isn't so simple.
Some insurance companies are now basing your insurance score on your credit rating. Your credit rating is the FICO (Fair Isaac and Co.) score that ranges from about 300 to 850. Instead of the factors above determining your insurance premiums, instead the insurance company will look at:
- How timely you pay your bills. This includes your credit cards, utilities and your insurance bill.
- How much you owe and your available credit limit. This includes your outstanding credit card balances, your mortgage, car payments, student loans, and how much credit you have available to you on your credit cards.
- Credit History. This is a mix of both how long you've had credit, and how long you've had credit with the same lenders.
- Credit mix. Is all of your credit just with credit cards, or do you also have a car or house payment? Having it all in one category may hurt your score.
- New Applications. Did you just apply for a new credit card? It may hurt your credit score if you did.
Why Credit Scoring is Important to Auto Insurance Rates
The reason why credit scoring is important to auto insurance rates is because your rates could go up, even if you are a defensive driver who hasn't filed a claim in years. It could also go up through no fault of your own, such as an error in your credit report or as the result of identity theft. Also important is that you have no means of offsetting the score by having a good driving record. Poor credit could last for years, and if you have no accidents during those years, it won't lower your premiums once cent.
Why are Insurance Companies using Credit Scores?
Insurance companies say that your credit score is a better indicator of your likelihood to get into an accident and file a claim than the traditional scoring methods.
Does Low Credit mean Less Responsibility?
One argument is that people with low credit are not good at taking responsibility in an important area of life: their finances. Therefore, they are less likely to take responsibility on the road. This could have some truth to it - however, some consumers feel it's like saying that all young male drivers likely to speed.
The other argument for using credit scoring is that people with bad credit are more likely to file a claim when they get into an accident, presumably because they don't have the resources to pay for minor repairs.
The insurance industry has found that those with good credit will often pay for minor claims out-of-pocket, which saves the insurance company money. How they know this isn't exactly clear, since people who pay for a claim themselves usually don't even report the damage to their insurance company.
What You Can Do
If your rates go up because of bad credit, call your insurance company and ask for an explanation. Next, obtain a copy of your credit report so that you can check for errors. If an error caused a change in your credit-rating, your insurance company may be willing to make an adjustment.
Also, consider shopping around. When you call for a quote, ask if they use credit-scoring to determine premiums.
Consider making a few adjustments to your finances which can help raise your credit score. Use major credit cards like VISA or MasterCard instead of department store credit cards. Use automatic bill payers to pay your monthly bills. Finally, avoid applying for new credit cards too often.
To further combat the use of credit-scoring, consider contacting your local congress person. The FTC recently approved of the use of credit-scoring by insurance companies, so the only way to stop this may be to get congress to enact a new law preventing insurance companies from doing this.