Your auto insurance rates are determined by a variety of factors including your age, gender, driving record and past insurance claims. In addition, the majority of auto insurance companies and an increasing number of homeowners insurance companies use credit information to decide whether or not to issue you a policy and how much you should pay for it.

According to the Insurance Information Institute, insurance companies use your credit score as a predictor of whether or not you will file claims, and that drivers with low credit scores file 40% more claims than drivers with good credit scores. As a result, drivers with bad credit might pay 20% – 50% more in auto insurance premiums than those with good credit scores.

Since insurance is based on the concept of risk (to put it simply: the probability of something bad happening), insurance underwriters use the credit score as means of determining the risk associated with a particular individual. Insurers have found a correlation between individuals that are a poor credit risk (i.e., those who don’t pay their bills on time) and those who file more claims — and more expensive claims.

Conversely, many people benefit from the credit report/insurance rate connection. If you are one of the majority of policyholders who have good credit, your premiums will be lower. Keep in mind that insurers use a different scoring model than the one that a mortgage lender uses. Instead of looking at your ability to repay a debt, the score used by insurers looks at your likelihood of incurring future insurance losses. In general, insurance companies are more interested in issues of stability as indicated by things like late payments, outstanding debt, bankruptcies and new applications for credit.

There is no doubt that this is a controversial practice. Many say that credit-based insurance rates are unfair to certain drivers. Some states, including California, Massachusetts and Hawaii, have even banned insurers from using credit scores to determine your auto insurance rates. However, the fact remains that 97% of insurance companies have been using credit-based scoring methods for determining premiums for many years, and the practice is unlikely to stop any time soon.

Are you concerned that your credit score has affected your auto insurance rates? What other concerns do you have about this practice? Contact us today to answer any questions you may have about the relationship between credit scores and insurance rates.