Anyone who owns any kind of automobile needs to have insurance, but sadly that does not mean that they understand all the factors involved in how their premium is determined. Insurance premiums are developed by analyzing numerous facts about the vehicle itself, and owner(s) of a vehicle.
Almost All Companies Use Credit Score to Determine Rate
Believe it or not, one of the key factors in determining auto insurance rates is the credit score of the driver or drivers. According to a recent survey conducted by Conning & Company of 100 insurers, 92 said that they actively use credit scores to determine auto insurance premiums. The general believe held by insurers is that credit scores can and often do say a lot about how responsible an automobile driver and owner an individual is, as well as how likely they are to pay their bills in a timely manner. Both of these figures are important since insurance companies are in the habit of trying to collect auto insurance payments from consumers they hope will never be involved in an accident or theft.
Credit scores can be considered a sign of responsibility because people who take their financial obligations seriously are more likely to take other aspects of their lives seriously as well. Those who go through life thinking that the world owes them something and never paying their bills unless they are forced to are generally speaking not the most responsible people who make the best choices.
Higher Credit Score Typically Means Reduced Risk
This directly relates to auto insurance in that policyholders who are responsible do things such as locking their doors, purchasing theft deterrent devices, and do not park in poorly lit and/or dangerous areas. Insurers prefer customers who will generally pay their insurance premiums for a greater period of time before they ever ask to be covered. In short: more money in the bank before the insurer ever pays out a penny.
Insurance companies cannot possibly know every single potential policyholder individually and thus have to use credit scores as a way to determine the general responsibility level of any potential policyholder. Other factors are also involved in this, some of them such as past bankruptcies actually appear on full credit reports because there are strong statistical links between credit and reliability.
Keep Your Score Above 600 In Order to Save
A particularly alarming figure that illustrates this point clearly comes from a study conducted by the Insurance Information Institute, which is a trade organization for insurers: drivers in the high-risk credit rating band (less than 600 points) file 40% more insurance claims than those in the lowest-risk credit band.
Of course being responsible also means paying the bills, and this is another key area where credit scores come into play. Credit scores are a reflection of how well consumers pay their creditors. Insurers may not be providing a tangible good, but they are providing valuable service, and justifiably want to be paid in a timely manner just as any other company would.
Being paid on time is important to any company because they have to pay their creditors, employees, utility bills, taxes and so on. Thus, consumers with poor credit scores tend to receive higher auto insurance rates not only because they may not routinely make the best decisions, but because they are statistically more likely to not pay on time. Failure to pay on time increases the need of the insurer to employ accounts receivable personnel and potentially retain the services of lawyers for the purposes of engaging in collections.
Higher Default Rates Cost Insurance Companies
Many consumers with low credit scores already know how to deal with collections agents and work out deals to pay only a percentage of what was originally owed. To insurers this means that not only do they have to either increase their staff or outsource, but they are doing so to collect less than 100% of what they expected to receive. As a result insurers tend to increase premiums to get what they can, while they can. Padding the premium allows consumers to still negotiation a partial payment that satisfies the interests of the insurer.
Cleaning up one’s credit can take time, but that is no excuse to drive uninsured! Find the lowest quote on auto insurance by using the Free Car Insurance Rate Finder tool at the top of the page right now!
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