Credit scores affect your car insurance rates. What else does?

Many of you already know this, but in case you did not, your credit score is used by many insurance companies as a criterion in setting your car insurance rates.  The lower your credit score (the worse your credit is), the higher your car insurance premium.
This almost doesn’t seem fair does it?  No, but, it’s not inconsistent with other ways that insurance companies use to determine the rate you pay for car insurance.  Insurance companies conduct research into many aspects of human behavior and how these potentially impact a person’s driving record.

As a result of this research, the vast majority of companies have determined that a person with poor credit=a person more likely to be a bad driver.  Thus, higher rates for those with poor credit.  But poor credit doesn’t just affect your car insurance rates.  It affects homeowner’s policies and other kinds of personal insurance lines as well.

What is Underwriting?
The process of determining an insurance rate is called underwriting.  It examines a person’s characteristics (age, marital status, etc.) and potential risks (miles driven) to determine an insurance rate.

In its simplest terms underwriting works like this:  The greater the risk the company thinks you present, the more you will pay for insurance.
Credit scores is one of the factors a company will use in determining the rate.  But there are other factors.

Other factors impacting your car insurance rates
•    Where you live – Insurance companies have data that shows the accident and claim rate is higher in some zip codes than in others
•    Type of vehicle – Sports cars and even 2-door cars cost more to insure.  Insurance companies believe that sports car drivers are more likely to speed and take chances driving; thus having more accidents.
•    Personal characteristics such as age, marital status and gender all impact rates.  New drivers pay higher rates than experienced ones, men generally pay more than women because they have more accidents and married people pay less than single people because again the research shows that single people have more claims than married people
•    Use of vehicle – If you use your vehicle for work, your rates will be higher; the more miles you drive the higher your rates will be; the number of drivers on the policy will also impact the rate.

Underwriting factors that LOWER your rates
•    Alarm/Security system – LowJack lowers your rates more than other types of security systems, but even a factory installed alarm system will result in a lower rate.
•    Good student discounts – The threshold is generally a “B” average or higher, but if you, or if you’re are a parent, your child, achieves “good student” grades, then you will receive a discount
•    Safety course graduates – Drivers who have completed a safety course will generally receive a discount
•    Auto features – anti-lock brakes, air bags and smaller engine size will all help to reduce your car insurance rates
New technology/New research

The nature of research used by insurance companies continues to evolve.  Recently insurance companies have begun using technology to conduct research into a driver’s actual driving habits.  Most famously, Progressive Insurance makes use of a plug-in tool to record how many times a driver brakes and how hard; the number of miles he/she drives and more.  They report that the technology has helped to lower rates more often than increase them.

Insurance companies use a wealth of research and personal information to determine rates for insurance of all kinds.  After all, they’re in the business of insuring risks.  That’s their job.  It is to be expected that insurance companies will continue to gather data in almost any way possible in their efforts to define good insurance risks and bad ones.

Follow Up
It is worth noting that on the issue of credit scores, some states are fighting back.  Many states have acted to ban the practice.  Massachusetts and Hawaii have banned the practice, but other states including Iowa, Michigan, Maryland and New York are exploring the possibility.

Comments are closed.