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How Credit History Affects Auto Insurance Premiums

Many factors are involved in determining an auto insurance rate. The age of the insured driver, the vehicle type and the individual’s driving history are all key factors. However, there is a more controversial factor used by auto insurance companies, which is individual credit history. It is important for all drivers to consider the following issues.

Credit Scoring
Insurers perform a credit check to determine an insurance credit score. They use FICO scores and credit history to assign a number. Each insurance company has their own method of calculating this score. By looking at specific items on a credit report, the insurer connects each one with either a positive or negative aspect of driving. They do this because many studies have shown that certain items on credit reports relate to the likelihood of people filing auto insurance claims.

Predictive Modeling
The practice of connecting various credit report items with auto insurance is called predictive modeling. While credit was not always used in the past, insurers still used a driver’s age and record to determine rates. For example, individuals who have several traffic accidents or tickets on their record are more likely to file claims in the future. In addition to this, statistics show that younger drivers have more severe accidents due to their lack of experience. These factors have remained true over the years. Many insurers feel that credit should be treated the same way as these other factors. However, it is much harder for consumers to understand their methods. Several court hearings regarding this practice have ended with insurance companies being able to prove that specific credit items really do relate to insurance claims.

Credit Considerations
Each company has rules for what aspects of credit should be used to calculate insurance rates. As it is with the FICO calculation formula, insurance companies assign a specific percentage to various credit items. While the aspects they consider are similar to the credit bureaus’ considerations, the percentages they assign are much different than the FICO method. The common factors insurance companies consider are current debts, types of credit, payment history, length of history, account balances, recent inquiries and bankruptcies.

Improving An Insurance Credit Score
By working on the areas of credit most companies review, it is possible to improve a credit insurance score. Be sure to keep balances low, pay all bills on time, keep old accounts open and close retail store accounts. It is also important to avoid applying for several new credit cards. As a rule, insurers check an insurance credit score every one to three years. Individuals who are working on improving their scores should ask insurers to recheck them before renewing a policy.

Reviewing Individual Credit
Some items on a credit report may be inaccurate. People who have common names often see items that belong to other people with the same name. In addition to this, some people experience the nightmare of identity theft. When this happens, there may be a long list of inaccuracies on a credit report. Be sure to dispute them. If identity theft is suspected, contact the major credit bureaus directly. In some cases, it is possible to receive an exception from an insurance company while a report is being updated. For any concerns or questions about insurance credit scores, discuss them with an agent.