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Why Is Your Credit Score Used to Determine Your Auto Insurance Rate?

By December 14, 2012 June 9th, 2020 No Comments

Edmond auto insuranceThe majority of American consumers know that a healthy credit score will make it easier and less expensive to obtain a car loan or mortgage. A dropping credit score can cause interest rates to soar for these financial products and also for credit cards. However, many people do not understand the role that credit scores have in determining insurance premium rates. Almost every car insurance provider in the United States, and the majority of homeowner’s insurance providers, use credit scores to make policy issuance decisions.

Insurance risk specialists warn that a drop in credit score can cause an increase in premium rates. Why is your credit score tied to your insurance? What can you do to make sure that you receive an accurate rate?

The role of credit scores according to insurers

Insurance agencies employ risk analysts who are tasked with researching the various factors that affect the cost and profitability of the policy products that they offer. Their goal is to make a profit by negating potential financial risks. If you are late with credit card or car payments, you are often considered an additional risk, as they that feel you are likely to do the same with the insurance agency. They insure themselves against the risk of servicing these clients by charging extra for their plans. This also protects other policyholders from having to pick up the slack for bad risks.

You might think that this is an unfair, biased, and arbitrary way to set rates, and such criticism has been made. However, the risk analysts have data to back up these kinds of pricing policies. Correlations have been found between the numbers of claims filed and credit rating. Those with a poor credit score have been shown to file more 40 percent more insurance claims than drivers with top credit scores (Insurance Information Institute). They also have more serious traffic violations and accidents. The insurance company charges 20 to 50 percent more because they have an increased likelihood of having to pay out a claim if you have poor credit. On the bright side, policyholders with good credit enjoy lower insurance premiums.

How are credit ratings factored into policy premiums?

Insurance agencies use several possible methods to figure your credit rating into your premium rate. The credit score is also known as a FICO (Fair, Issacs and Co.) number. They may use it alone. FICO also sells insurance scores. Other companies use a combination of their own proprietary underwriting criteria with the FICO score. Your full credit report is not necessary and is not pulled. The three national credit reporting bureaus can provide your credit and insurance scores alone. An insurance score is not the same as a FICO score, as it is more concerned with a long-term, stable credit history then with the risks associated with obtaining new credit.

What to do if you have a poor credit score

Of course, credit isn’t the only factor of concern that is used in auto and homeowner insurance rate calculation. Car insurance policies use age, car type, car use, where you live, and how many miles you drive. Yet, the role of credit cannot be dismissed. You need to investigate just how much of an impact it has, because there are variances among insurance providers. You also need to be sure that adjustments are made if your situation improves.

There are a number of agencies that place more emphasis on your driving record and customer history when determining your Edmond auto insurance policy, than a FICO score. Give Loftis & Wetzel a call at 855-360-0466 to find out how we can help you in making the best choice for your insurance needs.