How Credit Scores Affect Car Insurance

Credit Score and Car InsuranceHaving a credit report run is commonplace for practically everything in modern society. Whether it is a home or car loan, a job, a place to live or even buying insurance, people should expect the company to check their credit history. For this reason, it should be no shock that insurance companies use credit scores to calculate car insurance rates. Your credit report is essentially a summary of your financial behavior, responsibility, and strength, and a credit score can have either a positive or negative impact on your search for cheap car insurance.

Why Check My Credit?

A credit report or score says a lot about your finances. If your credit score is high, it means you have made payments on time and used your credit responsibly; the opposite is true for someone with a low credit score. Consumers with low credit scores are viewed as unreliable and as greater financial risks.

Auto insurance companies use a credit report to tell them if the applicant has paid their bills on time or had any criminal or civil judgements filed against them. This is extremely relevant to carriers because most people pay out their insurance policies in monthly installments.

Does Your Credit Score Affect Car Insurance?

According to companies, bad credit presents a higher risk to the company in many ways; however, little of this risk is actually associated with the person’s driving habits. Auto insurance companies use a credit history to assess your risk of increasing the insurer’s costs: bounced checks, missed or late payments, collections efforts and policy cancellations due to default are expensive for the insurance company. Carriers want to reduce the potential risk to their bottom line, and one of the easiest ways to do this is by offering cheaper insurance rates to consumers with good credit and higher rates to people with bad credit.

Does Credit Risk Equal Insurance Risk?

Although a case can be made for bad credit indicating “high risk”, there is a vast difference between you driving recklessly or unsafely and having bills you can’t or won’t pay. Auto insurance companies try to correlate the two issues, but the link is tenuous. Nonetheless, numerous financial studies have indicated that there is a very strong correlation between a driver’s financial history and his/her potential for future insurance losses. This does not directly tie your driving habits to your financial status, but the insurance industry uses your credit score to underwrite your coverage at a premium that takes into consideration all your risk factors.

Credit Report Affects RatesMany states have tried repeatedly to repeal an insurer’s right to use your credit as a factor for determining risk and insurability for auto coverage. Americans’ credit scores are worsening as a whole every year since the recession, due to job losses, mortgage defaults and rising prices and inflation, signalling that finding cheap car insurance is more important than ever.

You Are Not Alone

Since this credit crisis is a national trend, it shouldn’t surprise car insurance companies that American consumers are going through tough times that may affect their credit, but for reasons which are completely unrelated to their driving history. This trend could cause the insurance industry to eventually shift their risk profile and stop punishing those with lower credit and offer them affordable car insurance. Although people with bad credit may never have the cheapest car insurance that those with good credit have earned, it could become possible for those with bad credit to lower their rates by switching to a competitor.

Lowering Your Rates With Bad Credit

It’s impossible to change your credit history or score overnight. The only alternative is to try to lower insurance premiums by other means until your credit history has improved enough to make a difference before the next policy renewal.

We suggest families try these car insurance discounts to get lower rates:

  • increase your deductibles,
  • drop any unnecessary coverage,
  • take safety driving courses or driver’s education,
  • bundle all other insurance policies with the same company, and
  • try to pay for an entire policy period up front.

All of these factors will lower your premiums and increase your good standing with the company. If not, you can always compare car insurance quotes online to find cheaper rates and similar coverage.