Your credit score has a profound affect on your auto insurance rates. While at face value these two things may not seem related at all, you will see how seriously auto insurance companies take your financial responsibility when determining your rate.
The Insurance Information Institute reports that drivers with bad credit file nearly double the number of claims of drivers with normal or high credit scores. This information leads companies to assume that a person with bad credit is also an irresponsible driver. These type of high-risk drivers are more expensive to insure and those costs are passed along to the driver in premium payments.
Auto insurance companies use financial history (along with other risk factors) to classify drivers according to their potential risk. Strong correlations exist between a driver's financial history and their future insurance loss potential. Because of this, auto insurance companies believe the use of credit checks helps to write a policy for a driver at a cost that most accurately reflects that driver's specific risk.
An insurance credit score, what an auto insurance company uses to determine the financial risk of its customers, is slightly different from a regular credit (or FICO) score. Insurance companies generate their own scores by calculating a combination of up to four factors.
The resulting scores determine the varying premium amounts. Federal and state laws permit insurance companies to use credit information such as bankruptcies, collection activity, late payments, lines of credit and outstanding debt as factors to determine your insurance credit score.
There are many credit variables that are used to determine the risk of a driver to the auto insurance company. These include things such as unpaid debt, length of credit history, late payments on a variety of bills or accounts, new applications for credit, different types of credit used, payment patterns, available credit, public records, and past-due amounts. Different credit variables are used in different scoring models that are all put together and considered to produce the best prediction. A credit report can contain both positive and negative information, so it is not necessarily a bad thing to have insurance companies poking around in your financial history.
Different auto insurance companies will request their own unique combination of factors and approaches and may do their calculations differently so it's impossible to say exactly what will go into your particular companies calculations as you shop around for auto insurance. Indeed, insurance companies that are using the same credit information for an individual may have completely different scores.
As you can see, it is very important to take seriously your credit score because auto insurance companies take it very seriously. By maintaining financial responsibility you will end up saving money on your auto insurance.
