Your Credit Score and Your Car Insurance Rates

A person’s consumer credit rating effects many areas of his or her financial life. It generally determines a person’s credit worthiness and ability to fulfill a financial commitment. A consumer’s credit score also dictates the interest rates that will be paid on auto, home, and personal loans and is sometimes used in the application for employment process. However, many drivers and vehicle owners do not realize that consumer credit scores are often used in the process of calculating and determining their car insurance rates.

Studies have shown that car insurance policy holders with poor consumer credit history are more likely to be involved in auto accidents and more likely to file claims. Car insurance companies reason that customers with a poor consumer credit rating are more of a financial liability than those that have good credit.

Credit Score as an Influencing Factor in Auto Insurance Premiums

Most states in the U.S. permit auto insurance companies to consider consumer credit ratings when calculating insurance premiums. The practice has been in use for home owner’s insurance providers and has extended to car insurance companies, as these providers continue to claim that drivers and policy holders with poor credit history generally are involved in more vehicle collision and make more claims than those drivers and policy holders that have a good credit rating. Despite criticism from consumer advocacy groups and protests from car insurance policy holders, most state legislatures support the practice of using a consumer’s credit score in the rate calculation process.

FICO Score

Auto insurance companies employ a variety of methods when incorporating consumer credit ratings into the process that determines individual premiums. The three major consumer credit rating bureaus, Transunion, Equifax, and Experian calculate and rate each consumer using a score based on a formula developed by the Fair Isaac Corporation, or FICO. The FICO score is a result of consideration into a consumer’s credit history such as:

1. Current debt to credit limit ratio
2. Payment history
3. The presence or absence of bankruptcies, charge-offs and payment delinquencies

At their individual discretion, car insurance companies may use the FICO scores provided by all three credit bureaus, take an average of the three FICO scores or select only one FICO score to calculate and determine a person’s insurance rates.

In the competitive auto insurance marketplace, car insurance providers are always looking for ways to make their company more appealing and affordable than their competitors. One strategy is to provide discounts for multiple vehicles, good driving record and student coverage. Additionally, many insurance companies realize the value in attracting consumers with good credit, therefore they offer discounts to policy holders with a good credit rating.

Studies have shown that car insurance policy holders with poor credit may pay as much as thirty to fifty percent more for their insurance coverage than policy holders with good credit. One major car insurance company has been known to charge policy holders with poor credit as much as three times more for their car insurance coverage over those with excellent consumer credit.

Auto insurance policy holders and those that are shopping for auto insurance would be well advised to regularly check their consumer credit rating, FICO score, and their credit report that is provided by the three consumer credit rating bureaus, Transunion, Equifax and Experian. By regularly checking their credit report, consumers with bad credit can identify reasons for the poor credit rating and determine ways to remedy the problems.

Steps that can be taken to repair a poor credit history and credit score are to pay down credit card balances, contact financial institutions that may have reported false or erroneous information to the credit reporting bureaus for correction and be sure to maintain on time payments to creditors until financial commitments are fulfilled. By taking these steps, consumers with poor credit scores can, over time, enjoy the financial benefits of paying lower interest rates on loans, and potentially paying lower auto insurance premiums.

Other Determining Factors

While consumer credit ratings play a critical role in the calculation and determination of individual insurance rates and premiums, other factors should be recognized and considered when shopping for auto insurance coverage. Most states in the US require that every car, truck and motorcycle that is driven or operated on roads and highways be covered by an adequate auto insurance policy that is provided by a legitimate car insurance company.

The minimum legal requirements vary from state to state, and it is incumbent upon the consumer to conduct thorough and diligent research into what his or her state’s minimum auto insurance requirements are. Additionally, price comparison analysis and obtaining rate quotes are critical aspects in the auto insurance shopping process. By conducting adequate and thorough research, consumers with poor credit may discover a wide range of rates that are offered to people in their circumstances. Employing techniques to improve their credit history, understand how much credit is too much credit, and using negotiation tactics when shopping for car insurance may result in the consumer’s desired outcome of a obtaining a quality auto insurance policy at a reasonable, affordable rate, despite have a poor credit report.

Resources

There are many resources available for people with a poor consumer credit rating that are shopping for quality auto insurance coverage at competitive rates. A few of these resources may include:

• Online insurance directories
• Individual insurance company websites
• Insurance industry related Internet sites

These sources provide abundant information on the types of insurance policies that are available and the eligibility requirements associated with auto insurance policies. Auto insurance is a mandatory, long term investment. It is in the consumer’s best interest to compare rates and services provided by multiple auto insurance companies prior to committing to any one company. Such a practice could result in lower premiums, quality coverage, and superior service, no matter what the policy holder’s credit score.