Most drivers are aware that many variables, such as age, gender, and accident history, when setting auto insurance rates, affect their auto insurance premiums. Not all drivers realized that their credit score could also impact how much they pay for coverage, though. Here's how and why your credit score may impact your auto insurance rates, and what you can do about it.
Credit Scores Affect Auto Premiums in Most States
In 47 states, including Georgia, insurance companies are allowed to consider drivers' credit scores when calculating auto insurance policies' premiums. Massachusetts, California, and Hawaii are the only states that have laws prohibiting this practice.
In the states that allow the practice, weighing credit scores when setting premiums are permitted because multiple studies have shown a correlation between credit scores and insurers' payments. The University of Texas at Austin and the Federal Trade Commission each conducted a study that found that drivers with poor credit scores cost insurers more money.
To compensate for their increased costs when underwriting policies to drivers with low credit scores, insurers raise those drivers' premiums.
Insurers Consider Credit Scores Indirectly
Insurance companies don't directly consider drivers' credit scores. Rather than correlating specific credit scores with particular premiums. Insurers factor drivers' FICO or Experian credit scores into their own version of a credit score - an insurance credit score. Thus, the relationship between a true credit score and a policy's premiums is a mitigated relationship.
Credit Scores Have Significant Impacts on Insurance Premiums
The indirect relationship between credit scores and auto insurance premiums doesn't mean that the impact a credit score has is insignificant, however. Drivers with lower credit scores pay higher insurance rates, and the increase is often quite significant.
One investigation showed just how much of an impact a poor credit score can have. In a scenario that compared policies for a 30-year-old male driver in New York City, a sample driver with poor credit paid $6,524 for auto insurance while one with excellent credit paid $3,178. That's a difference of $3,346 - more than the excellent credit score driver's entire policy premium.
The amounts found in this scenario won't hold true for every driver because insurance companies base premiums on so many variables. Where the practice is allowed, though, the pattern holds true. Drivers with low credit scores pay a lot more - and sometimes double - for auto insurance.
Drivers with Low Scores Can Work to Improve Their Credit
The good news is that this variable is within drivers' control. Drivers with low credit scores can work to improve their scores by:
- Paying off debt
- Making on-time payments
- Avoiding new lines of credit
- Settling outstanding bad debts
- Addressing errors on their credit reports
Each of these actions will have a positive impact on a driver's credit score, and together the actions will have a powerful cumulative effect. In just a few months, a driver with poor credit can raise their credit score by several points. Even if drivers never reach an excellent score, each improvement can result in a premium reduction.
Once drivers raise their credit scores, they should request new quotes for auto insurance policies. Insurance companies don't constantly run credit checks, but requesting a new policy will prompt insurers to recheck a credit score. If the score has improved, the policy offered will probably cost less.
Drivers Can Request Multiple Quotes with an Independent Agent's Assistance
How much less a policy costs after improving a credit score depends on the insurance company. Some companies will offer larger reductions than other companies.
The easiest way to get quotes for auto insurance policies from multiple insurers is by working with an independent agent. To speak with an independent agent, contact us at Finley Pinson Insurance.