Credit Score Affects What You Pay for Car Insurance: Report - NBC4 Washington
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NBC4 Responds

Working 4 You: Responding to every consumer complaint

Credit Score Affects What You Pay for Car Insurance: Report

If you have no credit you could be paying 65 percent more for car insurance than those people with excellent credit. Consumer Reporter Susan Hogan explains a new report showing how your credit score affects what you pay for car insurance.

Personal Lines Policy for PCI Response:

“The issue of insurance scoring has been repeatedly reviewed and analyzed by regulators and legislators and is comprehensively regulated by the states. Experience has shown that policyholders with positive credit information are less likely to incur losses. Combined with familiar factors such as years of driving experience, previous crashes, and the age of your vehicle or home, insurance scores are another way for insurers to differentiate between lower and higher insurance risks.

“Numerous studies show this common sense method is far more reflective of driver safety than one's own driving record, as records can be wiped clean of injurious car accidents and safety violations through the completion of easy driver safety courses. In fact, studies go on to show most consumers benefit from the use of this system since it ultimately keeps rates affordable, a fact backed up by a Federal Trade Commission report which found credit-based insurance scores ‘may allow insurers to price coverage more efficiently producing cost savings that could result in lower premiums.’

“At present, almost every state in our Union regulates to ensure auto insurance rates are not excessive or unfairly discriminatory.

“The auto insurance industry serves the driving public well by providing a highly competitive and pro-consumer marketplace that gives consumers many options to choose from. As a result, if you don’t like your quote or the cost of your insurance, you can always shop around for a better price and we encourage consumers to do so.

“One of the benefits of shopping around is that if consumers have questions or concerns about how their price was determined, their agent or company can walk them through the process and discuss ways to adjust the price and coverage offerings.”

-Alex Hageli, Director, Personal Lines Policy for PCI

Insurance Information Institute Response:

The findings are nothing new. The use of credit-based insurance scores is a common business practice in the insurance industry that benefits most consumers by saving them money. Numerous studies by federal and state regulators, universities, independent auditors and insurance companies have shown that an individual’s credit history is a proven, accurate indicator of how likely that person is to file a future claim and the potential cost of that claim. Furthermore, a moderate-to-strong credit history may offset underwriting factors, such as a poor driving record or number of miles driven, thereby improving the availability and affordability of insurance for more consumers.

By using insurance scores, insurers can better forecast future performance and thus make sure that each person pays a rate that more closely corresponds to the risk of loss they represent. This means that if you are less likely to have claims that will result in losses for the insurance company, your insurance company can offer you a lower premium. And because those that will likely have claims (or larger claims) will end up paying higher premiums, insurance scores help your insurance company make sure that you won’t end up paying more than you should to help cover someone else’s future claims.

The use of credit-based insurance scores varies widely among insurers. Some use it only to rate new customers or those who are adding new vehicles, while others utilize the rating tool in virtually all aspects of the business including new business, renewal, policy modification and review every three years.

For many insurers, credit-based insurance scoring is one of the most important and statistically valid tools to predict the likelihood of a person filing a claim and the likely cost of that claim. Credit-based insurance scores are based on information like payment history, bankruptcies, collections, outstanding debt and length of credit history. For example, regular, on-time credit card and mortgage payments affect a score positively, while late payments affect a score negatively. People who don’t have any credit history, generally fair worse because there is no history on how their credit is. Much like someone who has never driven before; a new driver has no experience behind the wheel, so an insurer has no basis to determine whether that person is a good driver or not.

In addition to insurance scores, companies base rates on the following:

  • Your driving record. The better your record, the lower your premium. If you have had accidents or serious traffic violations, it is likely you will pay more than if you have a clean driving record. You may also pay more if you are a new driver and have not been insured for a number of years.
  • How much you use your car. The more miles you drive, the more chance for accidents. If you drive your car for work, or drive it a long distance to work, you will pay more. If you drive only occasionally—what some companies call “pleasure use”, you will pay less.
  • Where your car is parked and where you live. Where you live and where the car is parked can affect the cost of your insurance. Generally, due to higher rates of vandalism, theft and accidents, urban drivers pay a higher auto insurance price than those in small towns or rural areas. Other factors that vary from one area or state to another are: cost and frequency of litigation; medical care and car repair costs; prevalence of auto insurance fraud; and weather trends.
  • Your age. In general, mature drivers have fewer accidents than less experienced drivers, particularly teenagers. So insurers generally charge more if teenagers or young people below age 25 drive your car.
  • Your gender. As a group, women tend to get into fewer accidents, have fewer driver-under-the-influence accidents (DUIs) and most importantly less serious accidents than men. So, all other things being equal, women generally pay less for auto insurance than men. Of course, over time individual driving history for both men and women will have a greater impact on what they pay for auto insurance.
  • The car you drive. Some cars cost more to insure than others. Variables include the likelihood of theft, the cost of the car itself is major rate factor, the cost of repairs, and the overall safety record of the car. Engine sizes, even among the same makes and models, can also impact insurance premiums. Cars with high quality safety equipment might qualify for premium discounts. Insurers not only look at how safe the car is to drive and how well it protects occupants, they also look at the potential damage a car can inflict on another car. If a specific car has a higher chance of inflicting damage on another car and its occupants, some insurers may charge more for liability insurance.
  • The type and amount of coverage. In virtually every state, by law you must buy a minimum amount of liability insurance. The state required limits are generally very low and most people should consider purchasing much more than the state requirement—the recommended amount of liability protection is about ten times the average state minimum. If you have a new or recent model of car, you likely will also buy comprehensive and collision coverage, which pays for damage to your car due to weather, theft or physical damage to the car such as being hit by a tree. Comprehensive and collision coverages are subject to deductibles; the higher the deductible, the lower your auto insurance premium. While there is no legal requirement to purchase these coverages, if you finance the purchase of the car or you lease it you may be required by contract.

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