Tips: Credit score, insurance score and auto insurance premiums

It’s not that good or bad credit makes a driver a better driver; it’s that insurance companies have found that individuals with poor credit tend to file more auto insurance claims with personal injury or vehicle damage compared to folks with good credit. Therefore, underwriters evaluate each driver’s credit history to determine if a driver is considered a high risk from a claims perspective. Drivers with poor credit should expect to pay more for car insurance than their counterpart that has good credit.

Insurance companies look at five factors when it comes to evaluating credit and determining whether or not it will affect auto insurance premiums positively or negatively.

Payment History Affects Car Insurance Costs

When determining an insurance score, companies look to see if the driver has a history of making timely payments. Paying bills on time is looked upon favorably. They also take note of things such as bankruptcies, judgments and liens. Such negative public records will adversely affect car insurance premiums.

Outstanding Debt and Auto Insurance Premiums

The second most important factor taken into consideration is the number of open credit accounts, the amount of credit available and the amount of credit owed. Having several credit cards at or near the credit limit is a sign of financial instability. Insurance companies consider this a poor credit risk and charge higher premiums accordingly.

Drivers who wish to take advantage of lower auto insurance rates should reduce their outstanding credit to available credit ratio. In other words, using $10,000 of an available $20,000 in credit will cost a driver more in auto insurance premiums than if the driver only used $3,000 out of the $20,000 available credit limit; the lower the outstanding to available debt ratio, the better.

Length of Time Credit has been Established

To a lesser degree, auto insurance carriers look at the length of time the policyholder’s relationship with creditors. Long term relationships shows stability while several a frequent turn over in creditors shows instability and is not looked upon favorably.

New Credit and its Affect on Insurance Premiums

Regarding new credit, insurance companies look to see how many new inquiries, and recently opened accounts drivers have. New credit can be viewed as a double edged sword. An excessive flurry of new credit and credit inquiries is not recommended, but a slow steady planned re-establishment of credit is encouraged. In other words, sending out 20 credit card applications in a day or does not do much to improve credit scores, or lower car insurance premiums.

Types of Debt and Car Insurance Cost

The type of established credit is also weighed when determining a driver’s auto insurance policy premiums. Home mortgages are looked upon favorably as it shows a sense of stability and financial commitment. Credit cards don’t hold the same amount of weight, but if used responsibility, credit cards can help to improve credit scores and thus lower insurance premiums.

Each credit category is not weighed the same. Insurance companies tend to give more weight to payment history and amount of credit owed. While the other factors are important, they carry less weight when determining insurance premiums. Therefore, if drivers want their credit to positively affect car insurance premium, paying bills on time and maintaining low balances on credit cards is a step in the right direction.

How Insurance Premiums Are Calculated

Several factors affect insurance rates besides one’s credit-based risk score. For example, auto premiums typically (but not universally) depend upon:

Accident, claims and violation history
Age, sex, marital and employment or student status
Years driving and continuous insurance coverage
Vehicle age, make and model and the Zip code where it is garaged
Driver commuting distance and miles driven annually, and how the vehicle is used
Coverage options and deductibles

Property hazard insurance rates commonly are based on:

Zip code, age, size, construction type and condition of the premises
Property improvements, updates, features and amenities
Distance from a fire department and hydrant
Claims and loss history
Coverage options and deductibles

Insurance Score vs. Credit Score

Credit-based insurance scoring is different from and more arbitrary and complex than the more uniform credit reports used by banks and credit card issuers. Insurers use secret proprietary systems–often developed by Ph.D.-level mathematicians– and few reveal details about how they compute scores, nor do they disclose exactly what role they play in setting premiums. Consequently, it is impossible for an individual to know their score—and thus their rate—until they apply for coverage.

Before credit-based scoring took off, there were relatively few rating “tiers.” Now, using credit-based scoring, insurers have hundreds of premium tiers.

What Insurance Customers Need to Know

Under the Fair Credit Reporting Act, insurance agents must ask permission of applicants before using credit information in quoting premiums. Expect higher premiums or denial of coverage when refusing to authorize a credit inquiry.

A poor credit-based score usually is associated with a poor “ordinary” credit rating. For example, an individual with delinquencies or a substandard bill-paying history may pay up to twice as much for auto or homeowners coverage, then if the score were excellent. Since scores are not easily available, and every insurer calculates them differently, it pays to shop and compare rates.