Car Insurance and Your Credit Score

Hello, and welcome to Your Money 2.0. I’m
Thomas Fox, Community Outreach Director of Cambridge Credit Counseling. If you’re like
me, you find no pleasure in shopping around for car insurance. The process can be mind
numbing, confusing and downright annoying, but it’s something you have to deal with
if the state you live in requires that you carry an automobile policy. So, if you’re
going to put the time and energy into shopping around, you might as well do so armed with
the knowledge that can help you save some money. We did a little digging, and found
some interesting things that can affect your premiums – some of which may shock you. These days, almost all insurers take a look
at your credit report before extending coverage to you. Although some states have rules that
prohibit the practice, many states allow it, much to the dismay of consumer advocates.
What does your score have to say about your driving? It’s very simple: studies have
shown that people with lower scores are more likely to file a claim. Because insurance
companies are risk-based businesses, and would rather take in more money than they pay out,
this makes sense. The credit score also tells your insurer a little bit about your stability.
The logic here is that if your credit is in good shape, so are your faculties, reducing
the likelihood of your driving around like Burt Reynolds in Smokey and the Bandit. The
insurance company’s perception, ultimately, is that if you pay your bills in a timely
fashion and have had the same credit accounts for a long time, you’re less of a risk than
someone who pays late and frequently opens and closes accounts. The information in your credit profile is
used to create your “insurance risk score,” which is one factor that can determine your
auto-insurance rate. Unfortunately, your insurance-risk score is not available to you, but it may
be similar to your credit score. If your credit score is low but you’re a good driver, you
may find a better rate with a company that weighs other factors more heavily, such as
your driving record. You can find such a company by contacting an independent insurance agent
or your state’s department of insurance. Now, some of you may be saying “Hey, I don’t
make any late payments, so I should be okay.” Well, that may not be the case. Credit score
issues don’t just affect people with payment problems. Even borrowers with good credit
can see their scores drop if they have multiple credit inquiries, carry too much debt, have
their credit limits reduced by their lenders, or have errors on their credit reports. Just like the experts say, you should examine
your credit reports at least once each year to make sure the information contained in
them is accurate. If your credit rating decreases right before your auto insurance renews and
your insurance company takes the new rating into account, the lower scores could mean
a higher premium. On the other hand, if your credit scores have improved since you purchased
an auto policy, you may find a better rate with an insurance company that considers credit
scores when determining rates. You should also be aware that your automobile
model affects your premium. According to MSN, you won’t get these numbers from your insurer;
in fact, you may not be able to get them at all. But the auto insurers do have a rating
system for every car make and model. Most use a system devised by the Insurance Services
Office, which starts with the cost of the vehicle and then factors in safety and theft
data. Cars are given a rating from 1 to 27, and the higher the number, the higher your
premium. Now, you may already know that bad driving
can raise your premiums, but the amount of the potential increase may make you focus
on the road like never before. The industry standard increase to your premium after your
first at-fault accident is 40% of the insurer’s base rate. So, if your base rate is $1,000,
you could receive an increase of $400 after your first accident. Not every insurer has
this policy, and 40% is just an average. The bottom line is that in the majority of cases,
your rates will go up. What can you do beyond avoiding accidents? When you shop for a policy,
be on the lookout for companies that have an accident forgiveness policy. You’ll have
to qualify for the coverage, so be sure to ask about the requirements. Well, that’s it for this edition. As always,
we welcome your feedback and ask for your thoughts and suggestions by e-mailing us at
[email protected] Thank you for watching. Until next time, I’m Thomas
Fox for Cambridge Credit Counseling.

4 comments on “Car Insurance and Your Credit Score”

  1. delavalmilker says:

    I've worked hard and been diligent to keep a good credit score.  The Consumer Federation of America just had a press conference where they said insurers using credit scores to determine insurance rates is "unfair".  But if my rates rise because now I have to subsidize those with poor credit records, isn't that "unfair" to me?
    If study after study (from what I've been able to discover) shows that people with low credit scores are higher risks, then that's just the way it is.  Do we deny the well proven facts that smoking and being overweight increases the risk of health problems?  If I have to pay higher premiums even though I don't smoke and I exercise to keep an optimum weight, wouldn't that be "unfair" to me for my efforts?
    Our society has become so obsessed with being "fair" to everyone, which is really a euphemism for not stepping on toes.   So where is the motivation now for us to strive to improve ourselves–whether it is being responsible with credit or our health or anything else in life?

  2. Chris Coolski Downig says:

    I'm an agent and don't think credit should be a factor but it is.  Just another way to charge you more money.  Occupation I can see that being some what fair, but credit no.  Take a look at this

  3. MaxMax says:

    So if you buy a TV on credit and do not pay it, that means you have a higher RISK of an accident? LOL. But, in the first place, credit is giving out by Banksters and hyenas, LOL! They have a poor credit score by the people.

  4. Kenneth Pollard says:

    All a good credit score says is you pay a minimum payment on time that does mean you are not in huge debt. It should be called the debt score. So some that has never gotten credit and always paid cash has 0 score but has no debt. Should this person pay more on insurance for not have any debt? That doesn't seem fair or morally right. Its but now many employers run our score too. Insurance, employment, and landlords or mortgage companies all run credit scores which is stupid to me as a score just means we have made debt and pay a minimum monthly.

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