Many people are surprised to hear that auto insurance companies use credit scores to help determine insurance premiums. It is understandable that someone would be taken aback when they discover this fact. After all, a credit score doesn’t seem to have anything to do with how well you can drive. So why should it matter? It is important to understand one very simple thing: insurance companies exist solely to make money. To make as much money as possible, they must minimize risk and charge appropriate rates. As such, these companies employ many actuaries and other types of analysts to determine what factors can help accurately project client risk. During the course of this research it has been found that there is a very strong correlation between credit score and number of claims filed. Overall, customers with good credit are much less likely to file a claim than customers with poor credit.
Insurance companies use an insurance score to help calculate the risk of insuring each applicant. An insurance score is essentially the same thing as a credit score. However these scores are calculated in slightly different manners and utilize different scoring systems. The factors taken into account when calculating an insurance score and their respective weights are as follows: past credit performance (40%), current level of debt (30%), length of credit history (15%), new credit (10%), types of credit used (5%).
While the reasons for the correlation between good credit and claims filed may not seem immediately apparent, they become clearer with a bit of examination. For one, a client who has a strong credit score is more likely to be a responsible individual and therefore a responsible driver. Customers with poor credit could also be more likely to file a frivolous claim for financial reasons. Someone with a great deal of debt may get desperate and see a large insurance settlement as a way out. Obviously these are generalizations, but the overall statistics indicate that these risks do increase as credit scores decrease. Other reasons that customers with good credit may be more desirable include the increased likelihood that they will pay off the entire policy premium, and the decreased odds of them letting their policy lapse.
It is important to understand that credit and insurance scores are not the only important factor in determining your auto insurance rates. Driving history and insurance history are also extremely important. Having a good credit score does not guarantee that you will have a low rate, and having a less than stellar credit score doesn’t mean your rates will be through the roof. But showing that you are a responsible person and a responsible driver will lead to lower insurance premiums.
There are many benefits to maintaining a good credit rating, and this is one of them. Keeping your credit in check can end up saving you a lot of money on your car insurance.