Credit Scoring and Auto Insurance

Do you have a clean driving record and pay high auto insurance premiums, yet wonder why? Does your agent seem to avoid the subject when asked?

It is a touchy subject to be sure, but the reason may be something called an “insurance credit score”. Used by an estimated 90% of all insurance companies for auto insurance and home insurance, your credit score is quickly becoming the single, biggest item to affect your premiums. Even when you call around for auto quotes, just about every agent will run a credit score to determine what “tier” to place you in. They simply cannot quote you an accurate premium without knowing your score.

What is an insurance credit score? For starters, it is not your FICO score, used to determine your creditworthiness when applying for a home or car loan.

Insurance companies use their own criteria. And this criteria varies from company to company, making the issue even more difficult to understand.

The issue has reached the courts in many states. So far, the insurance industry has succeeded in their efforts to continue using credit to partially determine rates. Many of my own clients have asked, “What does credit have to do with our driving record”? That seems to be the big question. So far, there appears to be little explanation for the relationship between bad credit and higher claims frequency, or good credit and lower claims frequency. Some believe that people who make the effort to have excellent credit will also be more responsible in other areas of their lives, like driving habits. Agree or not, third party statistics seem to really indicate a relationship between bad credit scores and higher claims frequency.

Another issue is whether credit scoring is racially biased, as some claim. Some argue that those in lower income brackets have less disposable income, and statistically poorer credit scores, which throws them into higher auto insurance tiers.

If you shop around for car insurance or an auto quote, keep in mind that nearly every company will run an insurance credit score. These scores are treated different than if you applied for a car loan, home loan or credit card but understand that if you run out and obtain tons of different auto quotes with different insurance companies, it possibly could affect your score negatively.

The best advice is to have fewer credit cards. The typcial scoring model does not like someone with lots of open credit accounts, even if some have zero balances. You would be better served by cancelling those accounts with zero balances if you rarely use them. Also, do not max out your credit line. Try to keep a safe distance between your max credit line and what you have charged. You will be penalized in your score otherwise.

Source: htttp://www.choicearizona.com