Why Car Insurance Companies Check Your Credit
You’re probably familiar with the term, “credit score.” Well-informed consumers may even know what their score is. An insurance score is a number calculated based on your credit score and other factors, and is used to determine your insurance rates in many cases.
Here’s how it works: when you apply for car insurance, the insurer will check your credit history and calculate your insurance score, which represents the likelihood that you will file a claim. Insurers have found that people with better financial histories are less likely to be in accidents or to file claims against their insurance company.
Things that will usually count against you are bankruptcies, judgments, poor debt ratio (how close you are to “maxing out” your credit limit), charge-offs (lenders who have written off your bad debt), too many credit inquiries, or not enough credit. Things that will work to your advantage are making regular, on-time payments to your creditors, a good debt ratio (having more credit than you are currently using), and longstanding history of good credit.
If you have previously had insurance with this carrier, they will also use your previous history of claims made to approximate their risk. This is combined with your credit information and driving record to determine your insurance score.
Credit scores are not used by car insurance companies in the same way they would be used by a bank giving you a loan. Lenders typically use the credit score given to them by the credit rating bureaus, but car insurance companies each have their own methods for determining your insurance score. The good news is that by shopping around with several insurers, you can probably find a lower premium.
Some states regulate the ways in which your credit score can be used by insurance carriers. In many states it can be used to calculate your premium, but it can’t be the sole reason for a denial, cancellation or non-renewal. Also, most states require insurers to give an explanation for any adverse action taken on your policy. This can include denial, termination of coverage, or rate increases.
The best way to find out how credit ratings affect car insurance premiums in your state is to contact your state’s insurance regulator.