August 8, 2011

Why Your Credit Score May Matter For Auto Insurance Rates

Dozens of factors go into every auto insurance quote. Things like a driver's history and garaging location probably have the biggest impact on rates, but a policy holder's credit score might also be used. Most major insurance companies now look at a driver's credit score before issuing a policy, which may seem unnecessary to some drivers – how can there be a link between financial responsibility and the potential for a car insurance claim?

There are several reasons for the growing importance of a driver's credit score in his or her auto insurance quote. Insurers lose money when policies aren't paid on time, and a credit score offers a logical way to tell whether a driver will pay for a policy in a timely manner. By looking at credit scores for all of their drivers, insurance companies can reduce their costs significantly. A credit score may also indicate how responsible a driver is with a vehicle. Financially stable drivers are statistically safer and are involved in fewer accidents. From an insurance company's perspective, this means lower costs, as claims are much less likely. Some drivers with particularly low credit scores may be harshly penalized. Rates can climb quickly after even a few missed credit card payments. Drivers can pay twice as much for a policy because of their credit histories.

Some lawmakers have challenged the practice of using a credit score to determine an auto insurance quote. They argue that using a credit score amounts to discriminatory pricing, as it's essentially a way to charge blue collar drivers more for their policies. Several states, including California, have insurance commissioners that are directly involved in deciding which factors insurance companies can use to set their rates, and there's a chance that credit score may be removed from the list of acceptable criteria in the near future. Even so, most drivers are currently judged by their credit scores when getting an auto insurance quote.

Drivers can keep their auto insurance rates low by paying all of their bills on time, including credit card bills and vehicle loan payments. Missing a few due payments can easily lead to a higher auto insurance quote. Many car insurance companies also offer discount programs, which drivers can use to reduce high insurance rates caused by a bad credit score. These programs vary by insurer, and may include discounts for everything from taking a driving course to owning a home. Drivers should investigate these programs and get auto insurance quotes from all major insurance companies before picking a policy, especially if a bad credit score seems to be driving up premiums.