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.

Is Credit Usage to Blame For High Auto and Home Premiums?

If you own this car, feel free to skip this post.

This morning, I came across an interesting article from the Money section of CNN.com. Sarah Max, a frequent contributor to Money Magazine, discusses how your credit usage could be to blame for high auto and home premiums.

Per Ms. Max.

“In most states they (insurance companies) are allowed to use your credit information to formulate premiums - and in June the U.S. Supreme Court decided that your carrier doesn't need to tell you if your credit has caused you to pay more.

In concurrent cases against Geico and Safeco, the Justices unanimously agreed that the companies were not wrong in charging certain poor-credit customers more without notifying them.

The impact of the decision: "You are not going to know if your credit score is costing you," says Harvey Rosenfield, founder of the Foundation for Taxpayer and Consumer Rights.

How insurance premiums are determined is a recipe long kept secret from consumers. Some 90 percent of home and auto carriers use a score based on credit data as part of that recipe, according to risk-assessment firm Fair Isaac, known for its FICO credit score.”

The article then dives into further detail about the process insurance companies go through to determine rates. More importantly, however, Ms. Max discusses the importance of having a strong credit history.

According to Ms. Max, one of the best ways to put your credit score in the brightest possible light is to frequently check your credit report for accuracy . Regardless of who determines the credit score, the original data comes from reports established by the three major credit bureaus. To check your credit report now, click here.

In terms of insurance credit scores, insurance companies put a large emphasis on prompt bill payment. As well as a way to improve credit, paying back bills on time is the best way to avoid high auto and home premiums.

The article is definitely worth checking out for anyone with established credit or if you're in the process of reaching that point.

On a different note, Experian Consumer Direct recently conducted a study that determined the average credit scores of citizens in all fifty states. With an average score of 721, the citizens of Minnesota lead the nation when it comes to credit. Texas might be home to this year's NBA Champions -- the San Antonio Spurs -- but the Longhorn State currently resides at the bottom of the credit score standings -- owning the nation's lowest score, 666. For all you Texans out there or citizens of any state who want to improve their chances of catching Minnesota next year, click here for more ways to strengthen your credit.

Low Credit Score = High Auto Insurance?

Do you think that being a good driver is enough to keep your car insurance low? Think again! A majority of U.S. insurance companies use credit scores or similar tools - called customer ratings or insurance scores - to pick whom they'll cover and how much they charge.

Proponents say credit scoring accurately predicts the likelihood that groups of people will file a future claim for insured damages. They say a bad credit history indicates financial irresponsibility, which translates into irresponsible behavior in other areas.

But for some individuals, it simply doesn't make any sense. For example, people who use little or no credit or pay cash usually end up with low credit scores - and they have to pay more for car insurance because of it.

The point is, a poor credit score can affect your life in many ways. And a car insurance rate is just another example.