How Your Credit Score Impacts Your Auto Insurance Rate
Our credit score provides a fairly accurate portrayal of our financial health and how well we handle our financial obligations. Surprisingly, not everybody conceives it in terms of its association with auto insurance rates. Auto insurance companies, for the past 20 years or so, have been using credit as a determining factor to decide the premium rates asked from applicants. That’s why it is extremely important to learn how your credit score impacts your auto insurance rate.
Auto Premium Rates and Your Credit Score
Several studies confirm a strong correlation between a person’s credit score and the premium rate they are required to pay for insuring their automobile. Before we delve deeper into this relation, let’s define how this equation works. Simply put: the healthier your credit score, the lower would be your premium rate. The reason for this, as explained by auto insurance companies, is pretty simple. Studies confirm that those who have a careless attitude towards their financial profile, are more likely to be involved in road accidents according to most underwriters, which one of the reasons for the high premiums asked by lending bodies.
The general consensus of auto insurance companies is that people with a poor credit profile file more claims compared to those who have a positive credit record. Owing to this reason, most insurers ask for higher premium rates from people who have a low credit score, as they are conceived to be less creditworthy. On the other hand, people who have a high credit score are usually required to pay below-average premium rates.
Dissecting the Underwriting Factor
More often than not, just a few facts are enough to answer a question. Given this, it seems that for three states, at least – California, Hawaii and Massachusetts – denounce the use of a person’s credit score to determine their monthly repayment amount. Insurance companies in other states, albeit, consider people with a lower credit score to be less profitable prospects, which is the reason why they term them as “incurred losses”.
According to a study conducted at McCombs School of Business in Austin, the average loss on 1,75,000 different insurance policies of those who had a low credit score stood at $695. The jarring factor in this derivation is that most of these insurers use their own models to calculate credit scores, and do not follow a standard pattern. That is another reason why people find it a challenge to obtain an insurance policy with a low premium rate, if they have a low credit score.
The Big Question: What’s the Way Forward?
The question, whether evaluating premium rates on the basis of credit score is right or wrong, has been long asked by people. The biggest question that remains, however, is what you may do in order to buy auto insurance with low premiums. The only straightforward solution visible is to maintain a healthy credit score and history. Unfortunately, people who plan to purchase an auto insurance policy are usually unable to resurrect their credit score, due to a variety of reasons. If such is the case, it is advisable for them to obtain and examine credit reports from all three major credit bureaus, and check for any errors that may be affecting their credit history and seek professional help to get them rectified.
While the Federal Trade Commission (FTC) – after its analysis of multiple studies – expressed that using credit as an insurance-rate determiner tends to cause discrimination among minorities and people with low incomes, primarily due to the disparity in the scoring methods employed by insurers; there is nothing much you can do about it besides accepting that it does affect you as well. All in all, what remains in your hand is ensuring that your credit history is as immaculate as possible. Therefore:
- Pay all your bills on time
- Do not skip any payments of outstanding debts
- Get the errors in your report rectified at the earliest
- Track, monitor and peruse your credit reports regularly