It is mandatory to have auto insurance today. Although everyone knows that credit scores play a key role in determining loan eligibility, many people do not know that their credit scores affect auto insurance rates. Fortunately, rates are not affected by credit scores as much as loan rates are. However, it is important to understand what data insurers use, how it affects auto insurance rates and how insurance companies obtain it.
In a survey conducted by WalletHub, researchers found that some companies rely more on credit data than others. Fluctuation rates in premiums for identical criteria other than credit history showed fluctuations up to about 60 percent. Some companies that did not rely as heavily on credit data only had a fluctuation rate of about 30 percent. The average across all states between a car insurance premium for a person with no credit and a person with excellent credit was a difference of nearly 50 percent. Credit data is more important in some states than others. For example, Connecticut showed the lowest reliance on it, and Michigan scored the highest for reliance on credit data.
Insurance companies are required to be transparent about their use of credit information and pricing to consumers. While some insurance companies only use credit data in certain states, others use it in nearly every state they do business in. At this point, most readers wonder what parts of credit data insurers use if they are not looking at it in the same way that bankers and financial institutions analyze it. Insurers use credit scores to create an entirely different score, which they call a credit-based insurance score. The reason they formulate this score is to determine the likelihood of a policyholder filing a claim.
Credit-based insurance scores differ from typical credit scores. They do not include a person’s gender, personal information, income history or data about a current job. Think of them as a risk assessment tool. In the same way a life insurance company would look at a person’s line of work to determine the level of danger, an insurance company looks at outstanding debt, payment history, length of credit history, types of credit accounts and the pursuit of new credit. Payment history accounts for 40 percent of the score, outstanding debt accounts for 30 percent, length of credit history accounts for 15 percent, pursuit of new credit accounts for 10 percent and types of credit accounts make up 5 percent of the score.
A credit-based insurance score is not the only factor that determines a person’s policy premium. The type, age and condition of the vehicle play an important role. Claim history and driving history are also very important. If a 25-year-old man has a good credit-based insurance score with a bad claim history, a poor driving record and a new sports car with a V-8, that man may pay more than a man who has a lower credit-based insurance score with no claim history, a clean driving record and a vehicle that is a lower risk. To learn more about credit-based insurance scores and how they work in a specific state or with an insurer, discuss concerns with an agent.