Most people know that their credit history can have an impact on whether they get hired. But did you know that your auto insurance rate is likely to be set, in part, by your credit history?
In Connecticut and it most other states the insurance departments authorize insurance companies to use credit scores as a way to determine the kind of policy you can get and what you will pay in premiums.
Studies have shown that there is a strong correlation between credit histories and how people drive, says George Bradner, director of Connecticut’s property and casualty division. He said almost all insurance companies use credit histories in helping to determine the kind of policy a person can get and the premiums they will have to pay.
Credit history is only one of the factors, Bradner said in a telephone interview. Other factors include driving history, type of car, home town, how much a person drives, age, gender, and whether the person is single or married.
Bradner said he could not quantify how much of an impact a person’s credit rating would have on their premiums and it differs among companies.
“It plays an important role,” said Bradner, “and it can vary from company to company. That is why we suggest that you shop around. We have over 100 carriers writing policies in Connecticut.”
“The better your score the better your rate,” Bradner said.
InsuranceQuotes.com recently attempted to gauge the impact of credit histories on insurance rates and commissioned a study.
It used a hypothetical 45-year-old, single female driver, with a bachelor’s degree, no prior claims or lapses in coverage.
“The study found that if you have a median credit-based insurance score, you’ll pay 24 percent more for car insurance than a driver with an excellent score. And if you have a poor credit-based insurance score, your premium nearly doubles – your rate will increase by 91 percent,” according to insuranceQuotes.com.
Connecticut has limits on how credit histories can be used.
Policies can’t be denied based on credit histories and once a policy is written the carrier can’t change the rate at renewal based on negative changes in the credit history. However a person can ask to have his premium reviewed if his credit rating has improved.
Also, if there were an extraordinary event like an illness that resulted in a poor credit score, that could not be used against the driver.
The kind of credit rating used for insurance purposes is not the same as the ones used for loans and several companies have created their own ratings.
According to the National Association of Insurance Commissioners, Fair Isaac Corporation (FICO) uses the following formula for insurance credit reports to determine how consumers manage risk:
This is the breakdown of what it considers and how much the information generally weighs in figuring your credit-based insurance score:
- Payment History (40%) – How well you have made payments on your outstanding debt in the past
- Outstanding Debt (30%) – How much debt you currently have
- Credit History Length (15%) – How long you have had a line of credit
- Pursuit of New Credit (10%) – If you have applied for new lines of credit recently
- Credit Mix (5%) – The types of credit you have (credit card, mortgage, auto loans, etc.)
So how do you improve your insurance credit rating?
Pretty much the same way as you improve your regular credit score: Make payments on time and reduce your credit card debt. If you are behind on payments, catch up and stay current, says the Association.
This is ridiculous. I do not believe under close scrutiny by disinterested parties this purported correlation would be what these car insurers claim. It is just another way to gouge drivers.