Credit History – How Does It Affect Your Auto Insurance Rates?

February 25, 2016

Most people have heard of a credit score and may understand it is a factor in determining whether they can get credit, what kind of mortgage rate they can secure when buying a home, or whether they can even secure a loan. But did you know that your credit score might also affect your auto insurance rates?

What is a credit score?

A credit score is a three-digit number assigned to a person that indicates to lenders their capacity to repay a loan. Failure to pay bills, loans or establish credit, can affect the strength of a person’s credit score.

How does a credit score factor when determining auto insurance rates?

It turns out there’s a statistical correlation between your credit score and how likely you are to have and file a claim. Automobile insurance companies use credit scores to help determine the likelihood of an insurance claim in the future.

In 2003, the University of Texas conducted a study based on 175,647 policies. They found that those with lower credit scores tended to incur more car insurance losses and higher claims payout, and therefore, posed a greater risk to auto insurers.

The Federal Trade Commission also undertook an independent study to understand the relationship between credit history and risk and concluded similar findings to that of the University of Texas study.

Credit scores are just one component of an “insurance score,” which is the metric used by each insurance carrier when determining rates. Each carrier has its own proprietary algorithms and components that comprise its insurance score. Other factors that help determine rates include age, driving record, geography, annual mileage and the vehicle you drive.

What are your rights as a consumer?

The use of credit scores in helping to determine auto insurance rates is a controversial issue. To make sure that insurers use credit scores fairly for all individuals, most states have taken legislative action addressing the use of credit information in insurance underwriting and rating.

And three states – Massachusetts, Hawaii and California – have gone so far as to ban the use of credit scores when determining auto insurance rates altogether.

Insurance companies argue, however, that since using credit-based insurance scores, rates have become more accurate, benefiting safe-driving consumers.

Do you know your credit score?

The Fair Credit Reporting Act gives you the right to obtain your credit report for free. You may contest it and correct your credit history if you notice inaccurate information. You can annually check reports from the three credit reporting agencies at without paying a fee.

Monitoring and improving your credit score are proactive ways to help lower your auto insurance rates. For more information on credit scores and other ways to decrease your insurance premiums contact Brooks, Todd & McNeil.