Home Insurance Terminology Explained

Credit Scores, Your Auto Insurance Rates, And You

Your credit score can have a major impact on your mortgage, auto loans, and credit card rates. What you probably don't know is that it can also have a major impact on your auto insurance rates. The following explains how credit scores have become a useful tool in helping auto insurance providers assess risk and set insurance rates accordingly.

How Auto Insurers Assess Risk

There's plenty for a typical auto insurance provider to look at when it comes to determining a new or existing customer's likelihood of filing a claim. In addition to the customer's prior claims history and driving record, auto insurers also look at potential risk factors such as age, gender, marital status, current location, vehicle type, and annual income.

These factors are put together to create a profile that predicts a customer's likely behavior and risk potential. For instance, a relatively young, single driver living in a high-crime area while earning a relatively low income is more likely to file one or more auto insurance claims than an older married driver living in a low-crime area while earning a significantly higher income. Therefore, the single driver will likely pay more for insurance than his or her married counterpart.

Auto insurers also use credit scores to determine how likely you are to file a claim. However, the scores used for this purpose aren't the typical FICO scores you might see on your consumer credit report. Instead, insurance companies use their own unique credit-based scoring models to evaluate credit history and accurately assess a customer's potential risk factor.

How Your Credit Score Affects Your Rates

It's already a given that having a higher credit score can lower the cost of borrowing and financing. Likewise, having poor credit can make auto loans, mortgages, and credit cards more expensive. The same also applies when it comes to credit-based insurance scores and auto insurance premiums. In New York, for example, a typical driver with a clean driving record but poor credit may end up paying $1,759 more than a driver with the same driving record but an excellent credit score, according to recent data gathered by Consumer Reports.

Notable Exceptions

Calculating rates based on creditworthiness is an extremely common practice in most states. However, many critics argue that credit-based auto insurance rates have a negative impact on low-income and minority drivers, as well as those who may have suffered significant economic hardship. According to the Federal Trade Commission's own findings on credit-based insurance scores, the use of this particular model has led to African-Americans and Hispanics paying more for their auto insurance coverage than their non-Hispanic white and Asian counterparts.

For these and other reasons, some states have actually prohibited the practice of basing insurance rates on one's credit history or credit score. These states include California, Hawaii and Massachusetts. In these states, auto insurers are limited to basing their insurance rates on driving history and other traditional factors.

How You Can Lower Your Rates

Fortunately, there are plenty of ways you can take the sting out of paying higher monthly premiums for your auto insurance coverage:

  1. Work on improving your consumer credit score. Keeping your credit card balances low, paying off bills on time, and removing negative items on your credit report can help raise your score and subsequently lower your auto insurance rates.
  2. Shop around for providers offering the best available rates. Don't hesitate to compare multiple providers to find affordable coverage.
  3. Avoid creating gaps in your auto insurance coverage. Having continuous coverage can help lower your average premiums over time.

Most importantly, you should always drive safely and avoid driving behaviors that could put you at risk of filing an insurance claim.