How Credit Scores Affect Insurance Rates

Information about your credit score and insurance rates.

Auto insurers have used FICO scores for years to help them determine the risk posed by insuring any given individual. Just as a lender will use your score to decide whether to extend a loan, so, too, will your insurance company use it to calculate your premiums.

Below, we'll explore how your insurer uses your credit history to assign a risk score to your policy. We'll also explain how your FICO score is calculated, and describe some of the problems inherent with this type of risk modeling.

The Connection Between Your Credit Score And Car Insurance Premiums

If your FICO is a dismal 550, does this mean you're more likely to get into a car accident than someone whose score is 800? Not necessarily, but insurers have increasingly depended on these numbers to model the risk assigned to each policyholder. A relationship between a credit score and driving habits has been established, and bad credit sometimes increases the risk of future accidents and claims.

For example, insurance companies contend those who have bad credit are more likely to make poor decisions on the road. These decisions increase the likelihood of being involved in an accident, which in turn raises the odds of future claims. This increases potential loss risk for the insurance company.

A low FICO score also suggests a history of late payments. This issue is a serious one - more serious than many consumers realize. Car insurance companies avoid insuring people who are likely to pay their premiums late. In fact, they routinely cancel policies due to late or non-payment. By checking a consumer's credit history prior to extending coverage, the insurer can better assess the chances of late payments.

So, given the importance of your credit history and FICO score, how is the latter calculated? More importantly, what can you do to improve it, and thus lower your auto insurance rates?

How Your FICO Score Is Calculated

The Fair Isaac Corporation, which designed the credit scoring system used by the main credit agencies, keeps their formula hidden. However, they have publicly revealed some of the attributes that are taken into account.

The largest portion of your score is determined by your past payment history. The next largest is determined by the amount you owe creditors. At 35% and 30% of your score, respectively, these two categories are of particular interest to insurance companies who want to avoid late and non-payment issues.

The remaining portion of your FICO is split between three areas. The length of time your credit history has been established is weighted at 15%; new credit accounts, including inquiries, are weighted at 10%; and the types of accounts open in your name is weighted at 10%.

These latter three categories are important, but of lower priority for your auto insurer. The main goal for car insurance companies is to identify policyholders who show signs of stability, and to reward them with lower premiums.

Credit, Claims, And Risk Assessment

The use of credit histories in insurance risk scoring can lead to both positive and negative outcomes beyond the obvious. For instance, if your driving history is full of offences. In the past, most insurers would have balked at extending coverage without placing your policy into a high-risk class. Some might have refused to insure you at all. But lets say you got perfect credit (e.g. a FICO of 780), showing stability. In this case, many insurers would be willing to extend coverage at more reasonable rates.

Consider a different scenario. If for example you got a good driving record, but due to business bankruptcy got into debt. Struggling under a limited budget, some bills go unpaid. Your FICO score predictably declines. In this case, some insurance companies might raise your premiums due solely to your tarnished credit, regardless of your clean driving record.

The above scenarios present a compelling argument for shopping around. Each insurance company uses your FICO score differently to calculate their risk and your premiums. For this reason, invest the time to compare auto insurance quotes side by side to find the coverage you need at the best possible price."

The Basics of Liability Car Insurance

If you ever meet an accident, the affected party will definitely do its best to squeeze all the money out of you. That's perfectly normal because you're the one who collided with them and they're just victims.

The liability car insurance will pay for the repair expenses on the affected party's car. It will also pay for accident-related injuries. However, the affected party will do its best to take as much money from the policy even when they are already compensated, which is why you should increase your insurance policy's limits. But also remember that even though you increase your policy's limits, you will still have a lot to pay for because the liability auto insurance will not pay for your own repairs and your own injuries. Also, there's maximum as to how much the policy can pay. $20,000 is the maximum the policy can pay for each affected person in the accident and a max of $50,000 per accident.

Damage to property will only be up to $30,000 and no more. Yes, the policy is indeed helpful. Sadly, this does not cover your own car's repairs and your injuries. Car repairs are very costly and not to mention hospital fees, as well. I have a friend who only has liability auto insurance. He met an accident, bumping into an old man's old truck.
The man was fine because the collision wasn't strong.

However, the man still sued him for injuries! He was compensated for $1000, despite the fact that he didn't have any major injuries. But he didn't stop there. He also sued my friend for $50,000! Sadly, my friend only had up to $25,000 insurance compensation. When the man got the $25,000, he simply dropped that case. If pressed on the case, my friend would have sacrificed his property to pay the old man. It was just a minor collision and she was paid $25,000 for it! Even though my friend was freed from his problem with the old man, he still had to pay for the damage to his vehicle.

What happened to my friend should be lesson to everyone. You must believe me when I tell you that the affected party will really do its best to get all the money they can from you because, they are the ones affected, after all. The liability auto insurance will never really suffice. You still have to complement it with something else. It's easy to look for insurance online. Lots of providers allow online application and processing so it's a good idea to look there. Plus, processing is very convenient.

One shouldn't take these insurance policies for granted. We should all know how important they are. Always take time to learn more about your policy so that no loophole can be exploited in case something happens. This is where you'll be starting off so it's a good idea to do some additional reading about it before getting a car."

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