auto

Auto insurers use your credit history to set rates

Does having bad credit make you a bad driver?

Auto insurance companies think so. That's why they're using credit data to help determine your insurance rates.

Of the companies that responded to the survey, ninety-two of the 100 largest personal auto insurance companies in the country use credit data in underwriting new business, according to a study by Conning & Co., an insurance research and asset management firm.

The credit/car connection
It's not as wacky as it sounds. There does appear to be a connection between your credit record and the likelihood of you filing an auto insurance claim.

Drivers at the bottom of the credit heap file 40-percent more claims than drivers at the top of the credit heap, according to a study by the Insurance Information Institute.

Consequently, having black marks on your credit report could really bump up your auto insurance rates.

"A consumer with bad credit is going to pay 20- to 50-percent more in auto insurance premiums than a person who has good credit," says Clarence Smith, assistant vice-president at Conning & Co.

On the flip side, if you have sparkling credit you could land lower insurance rates by shopping around.

Here's why. Most auto insurance companies use credit data when underwriting new customers. Far fewer, just 14 percent of the nation's largest insurers, use credit data on contract renewals. And some states don't allow this practice at all.

So if you've been with your auto insurer for a while, there's a good chance your shiny credit record could land you a lower insurance rate at another company.

"Obviously, consumers with good credit are going to be in the best possible position," Smith says.

"If you know you have good credit, you may want to shop around. Even with an accident, you could qualify as a preferred customer with some insurance companies."

A study by the Casualty Actuarial Society shows that people with prior driving violations or accidents and good credit have much better loss ratios than people with clean driving records and a bad credit history. And a recent study released by the University of Texas says there is a "significant relationship" between credit scores and filed insurance claims.

An auto insurer prices policies based on a customer's potential to file a future claim. So someone with a flawed driving record and clean credit record could actually end up paying less for auto insurance than someone with a spotless driving record and a spotty credit record.

Credit isn't the main driver
Keep in mind, a credit record is just one of several factors that an auto insurer considers when pricing your policy. Other factors include your age, the type of car you drive, how many miles you drive and whether you live in an urban or rural area.

Just how big an impact your credit record has on your auto insurance bill varies -- based on the state you live in and the insurance company you choose.

"Good credit at one company may not be a good insurance score at another company," Smith says. "That's why it's important to shop."

Insurance is regulated at the state level. Some states allow auto insurers to use credit data in the approval process. Others allow insurers to use credit data when determining what rate class a driver falls into. Some use it for both.

For more information, contact the insurance department in your state. This map from the National Association of Insurance Commissioners links to each state's insurance department.

Insurance score secrets
Your insurance company doesn't actually peek at your credit report. Instead, it receives an insurance score from a credit bureau based on the information in your credit record.

Fair, Isaac and Co. provides the credit bureaus with the formulas to crunch insurance scores. Some insurance companies have their own scoring models.

Like a credit score, an insurance score is based on information found in a consumer's credit file. But the formulas used to arrive at the two types of scores are quite different.

"An insurance score is going to be less concerned with your propensity to take on new credit and more interested in how long you've been managing credit," says Craig Watts, a spokesman for Fair, Isaac and Co.

"Insurance scores focus on issues of stability."

Curious about your insurance score? Good luck finding out. Insurance companies aren't required to tell, and few do.

"I don't know anybody who will show you an insurance score," says Gerri Detweiler, author of The Ultimate Credit Handbook. "It's still a bit of a mystery to consumers."

Even if you could find out your insurance score, it might not be all that helpful. Yes, it could give you a sense of how a single auto insurer rates your credit record, but that's it.

When it comes to insurance scores, there's no uniform standard. So another insurance company, using another scoring model, could assign you a different insurance score and offer you vastly different rates.

The key thing to realize is your credit record does affect the cost of your auto insurance.

If you're having credit problems, it's best to stick with your current auto insurer until your credit record improves. If you must shop for a new auto policy, ask the insurer if they use credit data in their decision-making process. Not all insurance companies do.

You may be better off doing business with a company that doesn't use credit data when underwriting new customers.

It's also a good idea to check your credit report before shopping for auto insurance.

"Make sure it's accurate and complete and showing you in the best possible light," Detweiler says.

This step-by-step guide from Bankrate.com will show you how to request copies of your credit report from the three major credit bureaus and how to correct any errors you may find.

 

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