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Credit Scores – Still The Biggest Factor In Auto Insurance?

Your credit score determines the amount you pay for car insurance and also for home owner’s insurance, and into the future it could be the same for health insurance according to Bank Rate, a well established firm in the insurance arena.

According to the R Street Institute the biggest factor for most drivers to get carDon't Drive In The Snow! insurance is their credit scores to get them out of the “high risk” and into the coverage market where the cost of insurance is lower. According to the Cure, a New Jersey and Pennsylvania insurance firm, credit scores should have nothing to do with insurance coverage and the ability of a driver to pay a policy. Many in the market are debating the issue, however, many drivers do not realize that their credit score is a determining factor when applying for auto insurance rates. R Street asserts insurance firms should have highly wide latitude to set rates for the laissez faire market to control competitiveness.

Your credit score makes a huge difference in premium payments

So what is the big deal with your credit score and what does it have to do with car insurance? Credit scoring is the ability for an insurance company to determine how a good driver, the applicant, is when applying for car insurance. The insurance firm is going to look into all of your credit history going back ten years to determine your car insurance rate. What is the basis of your credit score against your premium? Based on statistical data and independent research has shown the worse finance history you have, the worse of a driver you will be. Thankfully, that is not the case with companies such as The Cure.

A report issued recently by the Federal Trade Commission on the utilization of consumers finance information in auto and home coverage markets concluded that credit-based insurance scores are predictive of the amount of claims purchasers file and the overall cost of those claims. In the report, a study of information for claims in which customers damaged somebody else’s property proved that insurance companies paid out virtually nearly three times as much for the group with the lowest scores when compared to the group with the highest scores.

The use of scores is certain to make the cost of insurance better match the danger of loss posed by the consumer. A higher-risk customer will pay higher premiums and lower-risk shoppers will pay lower premiums. And in the opinion of the Cure (Slogan, Drive Well), that is precisely what’s happened with the auto insurance industry. While the FTC can say insurance companies report three times as many claims the only data you have is from the insurance companies where the Federal Trade Commission received information about credit scores.

Is credit base scoring fair?

Is is fair? According to Cure is isn’t. However, according to them credit-based scoring has been the driving account for depopulating states remaining markets, which are government run markets of last resort for high-risk drivers. These pools are comprised of drivers that appear too dangerous to insure successfully. When drivers join up to these pools, they’re allotted to a carrier for a policy that is going to cost more.

Unfortunately during the harsh economic times for many drivers it is the only option which is to be classified into the “pools” of high risk driving and pay a higher premium. By permitting credit scoring, the Cure disagrees, insurance companies are far better to meticulously price policies based on “driving history” and not heavily weigh credit scores. In retrospect for people who have a bad credit score on paper if an insurance agency is able to add the “human” element the drivers would be able to have a more cost-effective policy. So drivers who looked to be too dodgy to insure on paper may not look so bad when you get a peek at their financial history and they have better access to cost-effective auto insurance as a consequence.

States with a ban on credit scores

There are three States which have a ban on credit scoring, California, Massachusetts, and Hawaii. Fortunately all three of the states have decreased the amount of uninsured motorist over the last three years. The states New Jersey and Pennsylvania have had a decrease in uninsured motorist probably based on companies willing to insure drivers without weighing credit scores as the primary determining factor to have insurance.

Lastly, and something to think about, recently a gentleman which has never had a speeding ticket nor a traffic violation or accident lost his job at a reputable company which he worked at for more than ten years. In 2011 he was laid off and had difficulty finding a job. Six months later his insurance premium increased by twenty percent based on his credit history. Is that justified? Would he be an unsafe driver?

Greg Fowler

Greg Fowler

Managing Member of AutoInsureSavings LLC, Greg has been in the insurance industry for 12 years and enjoys rebuilding vehicles. His goal is to help drivers save on anything related to automobiles. Travel and enjoying the outdoors are some of his hobbies. The best way to reach him is at his Twitter or Facebook Profile.

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