Clark Howard

Here's how your credit score affects your auto insurance rates

If you’re like me, you’ve tried to keep your car insurance from going up by being a good driver. The rationale has been that the fewer claims you file, the less likely your rate will increase. But if you happen to be in debt, there’s a good chance your car insurance rate is on the higher end. That’s because your auto insurance and credit score are related.

Auto insurers include your credit score as a factor when determining your premiums, but many motorists have yet to fully appreciate the effect their credit-worthiness has on their car insurance rates.

Here’s how your auto insurance and credit score are linked

On the flip side of this equation is the fact that three in 10 people mistakenly think that their driving record has a bearing on their credit score, according to a recent survey from Wallet Hub. Nonetheless, insurers say credit-based insurance scores actually reward the fiscally responsible among us.

You may be wondering where this idea that how you handle your wallet is related to how you handle your wheels comes from. The most comprehensive public research was done about a decade ago by the Federal Trade Commission in a report on the issue.

The agency found that several states bar insurance companies from basing their underwriting decisions solely on people’s credit scores and credit histories. It has a lot to do with the period of time — the “exposure period” — insurance companies can incur losses.

“[Credit] score developers start with the credit information available about customers at the beginning of the exposure period and the known losses for them during the period,” the FTC report says. “Score developers then use various statistical and other techniques to develop a model that predicts losses based on the credit information that was available at the start of the exposure period. If the relationship between the credit information and loss is sufficiently stable over time, the model can be applied to the credit histories of other consumers to predict the risk of loss they pose. ”

A report by the Insurance Information Institute (III) said that aside from credit scores, other factors, such as where a person lives, previous crashes, age and gender, help insurers determine who is more and less likely to file a claim.

How insurance companies handle those with no credit history

Of course, every person is different: An 18-year-old who may not have much of a credit history can’t possibly be judged the same standards as, say, a 40-year-old with a job and family, right?

When it comes to teenagers and other people without credit histories, many states mandate that insurers adhere to the National Conference of Insurance Legislators’ (NCOIL) “Model Act Regarding Use of Credit Information in Personal Insurance,” which was released in 2002.

The NCOIL rules, which many states have adopted verbatim, say that “no-hits” and “thin files” (people with no or scarce credit histories) should be considered to have “neutral,” or average, credit. The insurer also has the option of using another scoring model, which must be disclosed.

As a conclusion to its report, the FTC says, “A consistent finding of prior research and the FTC’s analysis is that credit information, specifically credit-based insurance scores, is predictive of the claims made under automobile policies. However, it is not clear what causes scores to be effective predictors of risk.”

So, the agency found that yes, a person’s finances could reasonably predict what kind of risk they were to insurers.

4 ways to keep car insurance costs down

So what can you — the consumer and motorist — do to help keep your insurance premiums down? As we’ve mentioned, a primary way would be to maintain good credit. But here are four other ways:

  1. Raise your deductible: Hiking your deductible from $200 to $500 could reduce your collision and comprehensive coverage cost by up to 30%, according to the III.
  2. Reduce coverage on your older vehicles: You could save money by dropping full coverage on your fully paid vehicles, especially if you don't drive them very often.
  3. Ask about low-mileage discounts: Some insurers discount the premiums of motorists who drive only a certain amount of miles annually.
  4. Negotiate: Call your insurer and ask how much you can save if you bundled your car insurance with our home. Ask them if you're paying for any add-ons like roadside assistance. Ask them how much you could save if you pre-pay for the year. Here are some more tips.

Now that you know what to do about auto insurance, is your homeowners insurance too expensive? Here's what to do about it.

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