How does your Credit Score affect your car insurance rates?
The use of credit scores in insurance based decisions is highly controversial as opponents have criticized several factors. Including how a person with an EXCELLENT (above 750) driving record and a decent credit score STILL pays a higher premium than a person with an excellent credit score.
In fact, several studies have shown that a person with bad credit has a strong correlation with the number/amount of claims made by an individual. In most cases the Insurance Information Institute (III) claims that drivers with the lowest scores file 40% more claims than those with the highest credit scores (The Federal Trade Commission and the University of Texas have also conducted similar studies with similar results). However, there are only 3 states in the United States that have banned credit reports from being used for insurance purposes (California, Massachusetts and Hawaii).
So what does this mean for you?In a 2015 study done by WalletHub a person with a poor credit score had a difference of 15-115% premium increase than that of a person with an EXCELLENT score (above 750) depending on the state you live in. Which means, a person with anything less than a excellent credit score can end up paying hundreds of dollars more a year as a result.
According to a 2 year Consumer Reports investigation, in Florida, a group of eight hypothetical adult single drivers with a clean driving record and a poor credit paid $1,552 more on average than if the exact same drivers had excellent credit score and a DWI conviction.
In another study by Quadrant Information Services, they gathered data from insurance data to see how credit scores actually affected car insurance rates in 10 major cities. The study evaluated price data on a minimum liability coverage for a 30-year-old woman employed in a clerical job, living in a ZIP code with a median income of $30,000, with no lapse in coverage and no accidents, moving violations or suspensions, driving a 2000 Honda Civic EX about 10,000 miles per year. They used 10 different levels of a credit score. The average annual premium in nine major U.S. cities for this driver, according to the study:
Insurance Company A:
$563 for an excellent credit score, $755 for an average credit score, and $1,277 for a poor credit score
Insurance Company B:
$948 for an excellent credit score, $1078, $1078 for an average credit score and $1318 for a poor credit score
Six other factors that can affect your premiums (besides your credit score):
1) If you are single, divorced, married or widowed.
2) Did you graduate from college?
3) Your job/career
4) Do you own your own home
5) Your grades in school
6) Price shopping
What can you do?When it comes to improving your credit score there are several steps that you can take. The first is to purchase your FICO Score (if you haven’t received your free annual credit report). It is the credit score that almost all insurance companies use to determine your credit history and the likelihood of paying them. The other is to visit Nexis Lexis to find out your credit-based insurance score.
It is then extremely important to ensure that there are no inaccuracies contained in your credit report. As a recent study shows that nearly 3/4’s of reports contain some type of error(s) on them. Correcting the error(s) and ensuring that every company reporting is following the laws can dramatically boost your scores. You can do this on your own or find a company that can do this for you.
Once you improve your score, what can you do then?Call your insurance company to insure that you are receiving the proper discounts for your car. Ask for a new premium rate. If they will not adjust your rate, maybe it is time to start shopping for a new insurance company.
For more advice on what to do or how to increase your credit scores, contact us.