Credit Repair

How Your Credit Score Affects Your Car Insurance Rates

Your driving record, age, where you live and what car you drive all play an important role in determining your car insurance rates. But so does another key factor — your credit-based insurance score.

A credit-based insurance score differs from your other credit scores in one big way: Other credit scores — such as your FICO® credit score — show how well you’ve paid your bills and handled your debt in the past. An insurance score, however, is used to predict how likely it is that you will file a claim with your auto insurer. In other words, your insurance score is a predictor of the chances you will cost your auto insurance company more money.

If you have a lower insurance score, it’s more likely that your auto insurer will charge you a higher premium for your policy. They are taking on more risk in covering you, and will charge you more to make up for it.

But while your credit score and credit-based insurance score are different, your credit does play a role in setting your insurance premiums. Auto insurance providers look at some of the financial information contained in the your three credit reports, one each maintained by the national credit bureaus of Experian, Equifax and TransUnion. And they use this information to calculate your insurance score.

Your past payment and debt history, then, could leave you with a higher or lower credit-based insurance score, which could also leave you with a higher or lower auto insurance premium.

The factors that influence car insurance rates

Your credit-based insurance score is just one factor that determines what you’ll pay for auto insurance. Other factors — everything from your age to what kind of car you drive — will help your insurer set your premium.

Your credit-based insurance score

A high credit-based insurance score will increase your odds of qualifying for lower insurance rates. According to the National Association of Insurance Commissioners, there is a correlation between insurance scores and your likelihood to get into an auto accident or file a claim with your auto insurer. Drivers with higher scores tend to file fewer claims, making them less expensive to insure.

Because of this, your insurer will charge such drivers lower rates.

“It is designed so that people only pay for insurance that is fair for their personal circumstances,” said Lynne McChristian, spokesperson for the Insurance Information Institute and professor of insurance at the University of Illinois Urbana-Champaign. “The majority of people are safe drivers. You don’t want those safe drivers subsidizing those who are not.”

What financial factors go into your credit-based insurance score? The association said your payment history, outstanding debt, length of your credit history, how much new credit you’ve applied for recently and the different types of credit you have — everything from credit cards to mortgages to auto loans — can all affect your insurance score.

Your credit-based insurance score, though, does not include personal information. Your marital status, where you live, your income, occupation, gender, race and whether you are participating in credit counseling are just some of the personal factors that don’t go into determining your credit-based insurance score.

Insurers in most states use credit-based insurance scores to help set your auto insurance rates. This practice, though, is banned in California, Hawaii and Massachusetts.

Esurance said that it uses credit-based insurance scores so that consumers don’t overpay for insurance. On its website, the company points to studies by the University of Texas and the Federal Trade Commission (FTC) showing that low credit-based insurance scores were an effective predictor of risk.

The practice of factoring a driver’s credit history into their auto insurance rate has faced criticism from consumer advocacy groups. Opponents of the practice say it places an unfair burden on consumers who may have run into financial snags through no fault of their own, and some say there isn’t a clear correlation between poor credit and driving habits.

Bob Hunter, director of insurance for the Washington, D.C.-based Consumer Federation of America (CFA), disagrees with the practice of relying on credit-based insurance scores — something CFA estimates 90% of U.S. insurers use.

“The insurers say there is a correlation between a low insurance score and drivers who file more claims. But we say that is not sufficient,” Hunter said. “You need a logical underpinning for why you are charging people more because they have lower credit scores. The insurers have no idea why lower credit scores mean more claims. They just want to charge higher rates.”

Where you live

The place you call a home can boost or lower your auto insurance rates, too. If you live in an area with more car break-ins and auto thefts, your rates will rise because of the additional risk you present to an insurer. The same holds true if you live in an area in which there are more car crashes.

The kind of car you drive

Auto insurers often maintain their own vehicle safety ratings to determine which cars tend to result in more claims or accidents. If you drive a vehicle that is ranked as a safer one, your insurance premium could be lower.

Insurers also consider how often different car models tend to be stolen or broken into. If your vehicle ranks as one that is popular among car thieves, you might have to pay a higher premium. It makes sense, then, to do some research on auto theft rates and safety features before buying a new vehicle.

Your driving record

The number of recent accidents, moving violations or DUIs you’ve had can also affect your insurance rates. If you have a spotty driving record, you can expect your insurance premiums to be higher. How much higher will vary by insurer.

Esurance, for example, looks at moving violations during the last three years when setting rates; it looks at DUIs from the past 10 years.

Esurance said that experience matters, too. If you’ve had a long driving history with no violations, a single violation might not have as big an impact on your driving record.

Your age

If you are younger, you may pay more for car insurance. That’s because you are less experienced and more likely to suffer an accident or moving violation. Young people are also more likely to take risks. Because of this, young drivers are considered a higher risk by insurers.

Your gender

If you’re a woman, you could pay less for auto insurance. Esurance, for example, justifies this by saying women tend to drive less than men and are also less likely to get into a car accident. Men are also about 10% less likely than women to wear a seat belt, meaning they may have a higher risk of suffering a serious, and costly, injury, according to the company.

Ways to reduce your auto insurance rate

Fortunately, there are ways to reduce the amount you pay for auto insurance, even if you happen to live in a neighborhood where car break-ins are common or you’re a younger driver.

First, you can ask for a higher deductible. Your deductible is what you must pay first before your insurance kicks in. If you have a deductible of $500 and you file a claim for $2,000, you’d have to pay that $500 from your own pocket before your insurer covers the rest. Your insurance premiums will be lower if you increase your deductible. Just make sure you can afford to pay whatever deductible you choose.

The type of car you drive makes a difference, too. Check the average insurance costs for any car you’re considering. Cars with augmented safety features or those that don’t attract as much attention from thieves will cost you less in insurance.

You might reduce your premium, too, by purchasing your auto insurance from the same company that you use for other forms of insurance coverage, such as life or homeowners insurance. Companies often provide a discount to consumers who purchase multiple policies from them.

Finally, ask insurers what kind of discounts they offer. Some will reduce your premium if you protect your vehicle with an antitheft device. Others will reward owners who drive their cars fewer miles or who take defensive-driving courses. These discounts can add up.

It also pays to shop around. Always get more than one quote for your vehicle’s insurance. You can do much of your shopping using online tools, such as LendingTree’s auto insurance marketplace.

 

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