Will Your Credit Score Affect Your Car Insurance Premium?
Car insurance is one of those monthly expenses that we all are entitled to pay. Sometimes it can feel like we are paying more than others. In reality, it’s very likely that you may be paying more for your car insurance than your best friends. We have all been told that our age, driving history, and type of car we own affect our rate. However, what about your credit score?
The reality is that your credit score is becoming another factor in the Car Insurance Youi algorithm to determine what your monthly premium will be. It is definitely not the biggest factor, however, it does weigh into determining your rate. Why is this possible? First, you need to understand how car insurance companies work.
An Incite On How Car Insurance Companies Determine Rates
Insurance companies are in the business of taking on risk. Many describe it similar to the practice of gambling, just with usually better odds. The goal of any car insurance company is to make money, which is the goal of any for-profit business out there. In order for the companies to make a profit, they must pay out less in claims than what they make from their customers.
To keep their claim payouts as small as possible insurance companies will rely heavily on statistics. These statistics show correlations between certain attributes in a person and their risk of filing a claim. For example, teenage drivers have been statistically shown to file for more insurance claims than other age groups.
The car insurance companies will use this data to determine the rate of the individual that is signing up. Those that have attributes which show a statistically high rate of filing a claim will be charged more than those who don’t. So following the example above, a teenager is likely to be charged a higher rate than a person in another age group.
Why Is My Credit Score A Factor?
According to two official studies that were done in 2003 and 2007 by both the McCombs School Of Business and the Federal Trade Commission, those with a lower credit score cost insurance companies more on average than those with a higher score. The study that was performed at McCombs was of over 175,000 drivers within the state of Texas. Their results show a steady correlation of claim pay out risk increasing as credit scores decreased.
The study that was performed by the FTC was looking into the effectiveness of credit-based insurance scores. The study found that using a person’s credit score as a factor in determining their insurance rate was an effective measure of the risk the insurance company was taking on. This study has been accepted by many insurance providers as the key to better assessing their risk for new customers.
Is It Legal?
The answer is that it depends on the State in which you reside. California, Hawaii, and Massachusetts have put a ban on using credit scores as a factor in determining an individual’s insurance rate. The remaining States haven’t put any sort of restriction on this practice.