Credit Scores and Car Insurance

In a previous post, I discussed how credit scores dramatically affect — negatively or positively — people’s car insurance bills. Although it’s a common misconception, car insurance companies do not use credit scores to predict payment behavior. However, insurance companies do use credit scores to estimate the number of claims that potential customers will make in the future. In an article from today’s issue of the Florida Sun-Sentinel, Dan Thanh Dang, a popular columnist who focuses on consumer interests, analyzes this topic in extensive detail.

Using the first-hand account of John Rogers — a 43-year-old salesman from Baltimore with a past clouded by financial struggles — Ms. Dang thoroughly discusses the tremendous dangers, insurance-related or not, of having a poor credit score.

Does a credit bearing have any impact on how people drive? This question, one of the most frequently asked regarding the impact of credit scores on insurance rates, doesn’t really have a definitive answer.

In the article, Mr. Rogers wonders the same thing: “I'm not the worst-credit person in the world and I'm not the best. But I don't see how it has any bearing on how I drive, though."

A credit score certainly won’t directly influence the way people drive, but in essence — at least in the eyes of insurance companies — it can.

In response to this question, Ms. Dang says, “Well, it doesn't — not technically, anyway. It does, however, play a role in how much you pay for your auto insurance. Insurance companies don't use your credit score to predict payment behavior. Some use the scores as a factor when estimating the number of, or total cost of, claims that customers are likely to make.”

Unfortunately for some, including Mr. Rogers, this can be quite a wake-up call for people who have low credit scores.

Per Ms. Dang:

Rogers found that out the hard way. When he recently opened his Erie Insurance renewal statement, Rogers was gobsmacked to find that his auto insurance premium had jumped by 12 percent.

Instead of the $7,400 he was paying for three cars (a 1999 Nissan Sentra, a 2000 Chevy Cavalier and a 2005 Chevy Trailblazer) and four drivers (himself, his 42-year-old wife, 20-year-old daughter and 18-year-old son), Rogers would now have to pay $900 more. "No one has had any accidents in the last five years," Rogers said. "The only claim we filed was from two years ago when someone kicked the side of my son's car door in while he was downtown. That was filed under an uninsured motorists claim. But that's it."

If you’re in a similar situation as Mr. Rogers — with a flawless driving record and exorbitant insurance rates — you need to find out why. More than likely, your high rates are due to a low credit score.

Do you know where your credit history stands right now? If not, then you need to check your credit report immediately because you need to know where your credit stands at all times. Click here to do so instantly. But also make sure to carefully look for any errors in the report, which can have detrimental effects on your credit score — thus costing you dearly, possibly thousands of dollars annually, through higher credit card, insurance, and mortgage rates.

For tips on how to improve a poor credit score, scroll down to view several of the previous posts on this blog. And for even more credit insight, click here.