Why Your Credit Score Affects Your Car Insurance Premium

By: David Schneider, Car Insurance Expert
CheaperCarInsurance.com

If you have a low credit score, you may be paying more for your car insurance premium than others with better ratings. It’s sad but true: your credit rating factors in to what a car insurance company will charge you for your car insurance policy.

Credit scores, of course, aren’t the only way an insurance company determines what to charge you for car insurance. Other factors that go into your car insurance premium cost include:

• Your driving history
• The year, make and model of your car
• Amount of coverage
• Your age

Why do insurance companies base car insurance premiums on credit ratings?

Studies show that people with lower credit scores are more likely to get into automobile accidents. It may not make sense to you, but since car insurance companies base rates on risk, a policyholder with a low credit score is a bigger risk, therefore more costly to insure.

There are five factors insurance companies look at on your credit score to determine if you are stable as a credit user, or if you are at high risk, which means you are more likely to file a car insurance claim:

1. Your past payment history on credit cards
2. How much you owe
3. How long you have had credit
4. How many newly opened accounts you have
5. Types of credit established

Each factor weighs differently on your credit score and insurance rating.

Why Credit Score Based Car Insurance Premiums May Be Discriminatory

Many people believe it’s unfair to base car insurance premiums on credit scores, as it’s discriminatory. African Americans and Hispanics had lower credit scores in recent studies, so by charging more for rates to people with lower credit ratings, it becomes difficult to define the line between financial status and race.

At one time in our history, race was actually a factor in car insurance premiums, so understandably it is an issue of some concern to many drivers.

Also, given these hard economic times, more and more people are seeing dips in their credit scores due to unemployment, overwhelming credit card debt and overall financial struggles. Adding an increase to your car insurance premium is the last thing you can handle when times are tough.

What to Do About It

There is a movement to ban credit based car insurance premiums, but so far it has met with resistance. Car insurance companies have more money than consumers to fight in court, so efforts to pass laws banning insurers from using credit information to determine insurance rates have been slow to change.

Speak to your insurance agent to learn if your company uses credit scores as part of their car insurance premium rating process. Write a letter to your Congressman to let them know you won’t stand for credit based car insurance premiums. The more people that stand up on the issue, the more likely we are to instill change.

If you are paying more on your car insurance premium due to a low credit score, work on improving your credit. Once it’s in a better place, contact your car insurance company and see if you can get your rate lowered now that your credit score is higher.

Get a quote with one of our many qualified insurance partners to see which one offers you the best deal, credit score or not, on your next car insurance premium. Just click the “Get a Quote” button above, enter a bit of information about yourself, and get instant quotes delivered right to your inbox. Choose the coverage and policy that provides you the best rate. You may be surprised how much money you can save, even if your credit score is poor.

Posted: January 23, 2010