Why do car insurance companies use credit scores?
Car insurance companies base premiums on several factors. Some things (like a driver’s accident history or traffic violations) relate directly to an individual’s risk of being involved in an accident. Other things like a person’s age or credit score have a less direct association with a person’s driving habits, but they do provide an overall image of a person’s level of responsibility. All auto insurance companies rely heavily on statistical information to determine the cost of a policy.
Auto insurance companies determine the cost of insurance by calculating a driver’s risk. Drivers who are found to be at high-risk of filing a claim will pay more for insurance than individuals with a low risk. The reason is that insurance companies must recover the money they pain in claims through increasing premiums. Because customers who file claims cost the company money to insure, they must pay higher premiums than those who do not file claims.
Drivers are considered to be high risk if they have been involved in accidents in the past or receive traffic citations. These infractions usually relate to “points” taken against a driver’s record. After a certain number of points accrue, the rates will increase.
Other factors are based off of statistical information for certain types of people. For example, young drivers are statistically more likely to be involved in an auto accident than people over the age of 25. This means that all teenagers and young adults pay more for car insurance than older drivers, even if they themselves have excellent driving records.
Why does my credit score affect my premiums?
A person’s credit score should have no bearing on his quality of driving, but it does factor in to the cost of his insurance. There are three primary reasons that a driver’s credit score is assessed on his policy:
1.) Drivers with good credit may be more responsible
People who are responsible with their credit will probably show similar care in other areas of their lives, such as while driving. Additionally, many people with bad credit are also members of other high-risk groups, like young adults.
2.) Drivers with good credit pay premiums on time
It’s likely that people with good credit pay their bills on time each month. This is important to insurance companies for the same reason it’s important to utilities companies or any other business. If a driver can’t be counted on to make payments on time, he will not be a stable source of income for the company.
3.) Drivers with good credit often file fewer small claims
Many people with poor credit may also not have much disposable income. Because they don’t have extra money on hand, they may be more likely to file a claim for minimal damage rather than paying for the claim out of pocket. They may also have a difficult time paying their deductibles.
Auto insurance companies dislike handling small claims if they can be avoided. Claims for a few hundred dollars use up valuable man-hours for inspections and claims processing; indeed, it costs an insurance company nearly as much in time to settle a small claim as it does to settle a large claim. However, drivers are much more likely to experience small claims than large ones. A driver may never be in an accident that totals his vehicle, but most people will have several minor fender-benders in their lives. People with disposable income may choose to repair this minor damage on their own and reserve the auto insurance for large accidents.
Drivers with poor credit may also use claims as a way to make extra money. If a person owns his vehicle outright, the settlement check will be paid him directly to use as he sees fit. If he chooses to file a claim for cosmetic damage on his vehicle, he can opt to use the settlement money for something other than repairing the vehicle. This is something a person with poor credit is more likely to do than a person who is more financially secure.
Although a person’s credit score is a factor in deciding his premiums, it holds less weight than his driving record or other things. If you have bad credit, you can still get affordable auto insurance by maintaining safe driving habits. As your insurance company learns that you are responsible with making payments on time, your premiums may begin to decrease.