Does Your Credit Score Affect Your Car Insurance Rate? It is a question that you might have asked about before - especially if you have a particularly spotty credit record. Unless you live in California, Hawaii or Massachusetts, the short answer is yes. However, the explanation of the relationship between credit scores and automobile insurance rate setting is more complex.
What factors influence a car insurance rate?
Obviously, your driving history has an impact on the estimated risk that your insurance company assumes taking you as a driver. There are also other risk factors that affect your car insurance, according to the Insurance Information Institute: where your car is parked at night, your sex, your age and the type of car you drive. Also relevant to your rate, according to insurance companies, is your credit score.
The practice of using credit scores on setting insurance rates has been around for at least 20 years. According to at least two studies, a 2003 study conducted at the University of Texas McCombs Business School in Austin and a 2007 study by the Federal Trade Commission, there is a statistical correlation between how much a consumer costs a company insurance and credit score of that client.
The Texas study examined a random sample of 175,647 people in the state and found that "the lower the credit score of a named insured, the greater the likelihood that the insured will incur losses on a car insurance policy and higher will be the expected loss in politics. " The study authors noted that they did not attempt to explain why the credit score significantly added to the insurer's ability to predict insurance losses.
The FTC study found that credit ratings based on credit are effective predictors of risk under auto policies. "They are predictive of the number of consumer claims and the total cost of claims," write the study authors. "Therefore, the use of scores is likely to make the price of insurance better match the risk of consumer loss, so that, on average, high-risk consumers will pay higher premiums and lower consumers risk will pay lower premiums. "
It is also important to keep in mind that insurance companies do not use traditional credit ratings. They build their own scores based on FICO or Experian scores: Basically, companies take their score and use it in their own model.
But is this fair?
According to J. Robert Hunter, insurance director of the Consumer Federation of the United States, credit rating was the first classification factor used by insurance companies that was not based on traditional actuarial research. Prior to this, he says, rate factors were determined by developing a thesis and then testing it by collecting data to determine if it was correct. For example: If the thesis was that drivers with a DUI conviction could have more claims in the following year, actuaries could look at the statistical evidence to see if such a thesis was correct.
Hunter said advocates of using credit scores in car insurance rates "still can not explain what they are measuring, coming up with explanations like, 'Sloppy with financing means sloppy with driving.
"Of course, when the 2008 financial crisis struck, many people developed worse credit scores that had nothing to do with their oversight," he said.
"The fact is that credit is a substitute for classes of prohibited rates, such as income and race," Hunter said. "Insurers are prohibited from using these factors in all states and we believe this is their way of avoiding the ban."
But others argue that insurance is a game of numbers and practice, though unfair, could be logical. Frankie Kuo, an analyst at ValuePenguin.com, says insurers are "doing their best to find out if their future and current insured are a good or bad risk."
What you can do to mitigate your costs
Regardless of whether the use of credit history is fair, it is legal in all but three states. So what can you do if your credit score is less than perfect? As always, your best option is to look for an insurance company.
"Insurers always differ in how much weight they put on each rating factor, and I guarantee that consumers will always find one that finds their credit score imperfect less of a problem than other insurers"