Good Credit: Driving Consumers To A Lower Car Insurance Rate

By: Yara Zakharia, Esq.

Did you know that unpaid bills can increase your car insurance rate? Well, that's the bad news. The good news, however, is that a positive credit history will qualify you for an attractive online auto insurance quote thus lowering your auto insurance rate.

Reliance on a driver's credit rating is now an auto industry standard. An increasing number of auto insurance companies consider a driver's credit score to be a critical factor in the car insurance rate assessment. In fact, some insurance companies focus more on credit rating than driving record.

While some insurers will utilize actual credit reports to determine the car insurance rate, most will employ an "insurance credit score", which is a fast and economical method to underwrite and calculate risk. Consumer reporting agencies, such as Fair, Isaac & Co. and ChoicePoint, supply an insurance company with a consumer's credit score based on formulas they developed for the insurance sector. Furthermore, some of the most prominent insurance companies are designing their own consumer-scoring systems and bypassing the standard formulas created by outside providers. Nevertheless, these insurers who are creating their own credit rating calculation methods still turn to the national credit reporting companies for the raw figures.

Credit rating will vary depending on the insurer, since each company will take into account different criteria in setting a driver's auto insurance rate. Some of the factors relied upon to determine credit rating and ultimately, the car insurance rate, include:

  • Length of credit history
  • Number of credit cards held
  • Public records (liens, judgments, bankruptcy)
  • Outstanding balances on credit accounts
  • Unused credit
  • Type of credit used
  • Record of late payments
  • Frequency of recent application for new credit

By rating a driver's financial stability, a credit score enables an insurance company to do the following:

1. Predict future losses (i.e. insurance claims or accidents),

2. Identify drivers posing the lowest and highest risks,

3. Reward financially-responsible individuals by lowering their car insurance rate, and

4. Fix more accurate rates.

Through the credit rating mechanism, insurers charge a car insurance rate that is proportional to the risk that they are assuming. The higher the credit score the lesser the insurance risk and the lower the car insurance rate. A driver with a tainted credit history or with little or no credit history will be subjected to a higher insurance rate.

An insurance company may refrain from charging, or in some circumstances, may be required not to charge loyal and trustworthy clients a higher insurance rate simply because the latter have a low credit score. A credit rating usually does not fluctuate significantly over a short period of time.

Today, auto insurance companies’ use of credit rating in credit "scoring systems" classifying customers into average, low-high or high-risk categories is practically ubiquitous. In light of the fact that more and more companies are scrutinizing drivers' credit history, and more importantly, that credit rating directly impacts their car insurance rate, it pays to have good credit.

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