Your credit score can have an effect on many areas of your finances, including your ability to purchase a house or obtain a car loan. But did you know that your credit score could also have an effect on your auto insurance premiums? The following explains how auto insurance providers use credit scores and how your scores can raise or lower your premiums.
What Auto Insurers Look for in a Credit Score
Your credit score -- also known as a FICO score -- is commonly used as a snapshot of your creditworthiness. Banks, mortgage lenders and credit card companies commonly use the scores to predict your ability to reliably repay loans and other debts. Common factors that are used to determine your credit score include your debt payment history, current outstanding debts, current credit balance and the overall age of your credit history. So how does your credit score affect your auto insurance premium?
As far as many auto insurance providers are concerned, high financial risk also translates into high risk driving behavior and an increased likelihood of filing an insurance claim. There have been many studies that correlate poor credit with a poor driving record and a greater likelihood of risky driver behavior.
Credit Scores vs. Insurance Scores
In addition to credit scores, your auto insurance provider may also use another point-based scoring system to determine your likelihood of filing an insurance claim in the future. This score, known as an insurance score or insurance credit score, uses many of the same factors that are used to determine your credit score. However, while credit scores are used to determine your creditworthiness when it comes to lending, insurance scores are purely used for underwriting decisions as well as determining premiums.
According to InsuranceScored.com, an insurance score can be as low as 200 or as high as 997. As with credit scores, an insurance score of 700 or above is generally considered good, while a score below 500 qualifies as poor.
What This Means for You
Depending on your credit score or insurance score, you could wind up paying more or less for your auto insurance coverage. According to Consumer Reports, the difference between a driver with a good credit score versus one with the best possible credit score is an average of $214 per year. Having poor credit could end up costing you hundreds or even thousands of dollars in additional premiums each year.
When Insurance Companies Can't Use Your Credit Score
The practice of factoring credit scores to set auto insurance premiums isn't a popular one among many people. In fact, three states (California, Hawaii and Massachusetts) have gone out of their way to prohibit insurers from using credit scores. In these states, auto insurance providers must rely on your driving record, average mileage and other factors in order to set premiums. Talk to an agent, like Wyatt Insurance Agency, for more help.