It is not surprising most people believe the cost of auto insurance relates only to things like their driving record, age, and the types of cars they drive. What many drivers might not realize, however, is that in the majority of states, their credit score will also serve as a significant factor in determining how much they pay to be insured. One of these practices, which is called credit-based insurance scores, has been spreading like wildfire and garnered a lot of criticism as well. Today, we are going to discuss credit scores and insurance rates as well as why insurers benefit from using this information.

What is a Credit-Based Insurance Score?

The first thing you need to know is that a custom credit score for insurance companies isn’t technically the FICO model many of us are familiar with (during loan or credit card applications), colonies. Insurers, instead, use something called a credit-based insurance score. It is derived directly from the information in your credit report, but it has been specifically weighted for insurance factors rather than long-term loan repayment.

Why Do Insurance Companies Use Credit Scores?

Insurance companies say that credit-record data are closely related to the chances of policyholders filing claims. Annual Comprehensive Premiums by Auto Insurance Score Credit scores The underlying data show that people with higher credit scores tend to file fewer claims and lower-costed ones, thus are less risky. Why Insurers Use Credit-Based Insurance Scores

Correlation Between Credit and Loss: Numerous studies have demonstrated that credit-based insurance Scores are predictive of claim behavior Insurers claim that this enables them to have a better understanding of risks, which in turn helps them determine accurate policy rates.

Credit scores are an objective measure, and unlike many factors used in insurance pricing (whether age, how much one drives to work or subjective assessments) the score can’t be based on self-reporting so it is a fact.

Speed: Insurers can automate part of the underwriting process by using credit scores, potentially allowing them to secure quotes and issue policy information quickly.

This form of correlation with other factors: Some studies show that credit scores have a higher examination embedded risk considerations, transitional to the measure or basic evaluation instruments such as personal responsibility firefighting efforts.

How Credit Scores Affect Auto Insurance Rates

Your credit score affects your auto insurance rates — a lot. How much exactly will depend on the insurer and state you are in, here is a general idea of what it might look like:

Good Credit: If you have a high credit score (usually 750 or better), this is your ideal range, all else being equal it means lower rates for you.

Average Credit: A 700-749 credit score is considered good, but you might not see the same rates as those in the excellent range.

Fair Credit: With credit of 650-699, you may be looking at average rates.

Bad Credit: If you have a credit score lower than 650, you may pay astronomically higher rates (twice or even thrice as much) compared to someone with excellent credit.

It is worth, however mentioning that the effect of a credit score on insurance rates does not have a linear relationship. Generally, the difference in rates for poor versus average credit is far more substantial than good compared to excellent.

Controversies and Criticisms

Not surprisingly, the practice of using credit scores to determine insurance premiums is quite controversial. Opponents of this practice are asking a few questions:

Fairness: Critics argue that credit scores have no bearing on driving skill or risk and that their use is unfairly damning to those less privileged by income, of recent financial problems, etc.

Racial bias: Research in this area has raised concerns about indirect discrimination, such as the fact that credit scores have typically been lower for certain racial and ethnic groups.

Privacy: Some contend that the use of credit for insurance purposes is an invasion of privacy; type reports were not intended as part of a lending decision.

Complexity – the use of credit scores introduces more complexity to insurance pricing and makes it less transparent for consumers.

State Regulations

Because of these controversies, some states have limited or banned the use of credit-based scores for insurance pricing:

After this study was conducted, California, Hawaii, Massachusetts, and Michigan prohibited auto insurers from using credit scores in pricing.

In some states, the use of credit information for insurance is restricted or insurers are required to disclose if a lower rate was charged because of favorable credit and when negative factors were used against an applicant.

What Can You Do?

Here is what to do next if you are worried about how your credit score is impacting the amount of auto insurance rates.

Check your credit report: Keep an eye on any errors in the credit score you received, and dispute them if they do not align with what you know to be true!

Boost Your Credit: Boost the old credit rating simply by attempting to repay expenses promptly, decrease debt and never taking on new credit accounts whenever possible.

Shop Around: Since each car insurance company uses your credit score differently, get several quotes before committing to a policy.

Exceptions: Some insurers have an exceptions program that lets you request consideration for specific life events like a job loss, a divorce, or severe medical problems If any of these issues negatively impact your credit.

CONCENTRATE ELSEWHERE – Improve your credit and bide it with factors you can control including a good driving record, vehicle choice (one with top-tier safety scores), or even just the age of electronics about seatbelt use.

If you’re a safe driver with poor credit, usage-based insurance may be an option that some insurers offer wherein your rate is almost entirely dependent on how well and how much you drive.

Conclusion

When it comes to whether credit scores should be used when setting auto insurance rates, the issue is complex and somewhat controversial. Though insurers assert that the practice permits better risk assessment and results in a more equitable pricing system, there is merit to some critics’ fears about how it disadvantages certain segments of consumers.

As a policy buyer, it is an obligation to see how your credit score may up or downscale the value of insurance premiums. Luckily, you can see a lot of success times if (you go) for the best credit available and make sure that other measures remain under your control.

Keep in mind, that credit is one variable among many insurers used to price rate policies for auto insurance. So, take a well-rounded approach as a responsive driver and financially savvy consumer to ensure that you can navigate this auto insurance market.