Why Does My Credit Rating Affect My Auto Insurance Policy?

Since you aren't borrowing anything when purchasing auto insurance, you may wonder why your credit rating has anything to do with your auto insurance policy. The truth is that in many states, credit rating is a factor in determining your premium. The reason for this is that insurers have found that there is a correlation between losses that the company will have to pay benefits on, and the credit rating of the policy holder. Evidence of this can be seen in a 2004-2005 Texas study comparing credit rating and general risk.

Credit Study Finding on Auto Insurance Losses

The Texas Department of Insurance collected data on two million insurance policies from companies that provide private passenger auto insurance. They then plotted the loss claims for these policyholders against the policyholder's credit ratings. What they found was a direct correlation between loss and poor credit scores, with the people with the lowest credit scores actually reporting double the average loss per vehicle than the people with the best credit scores.

Credit Study Finding on Accidents

The study also calculated the relationship between frequency of accidents and credit scores. The finding was that drivers with the worst credit were involved in roughly 40 percent more accidents than drivers with the best credit.

Credit Rating and Auto Insurance

The Texas study has been corroborated by other studies finding similar relationships between credit rating and insurance losses. For insurers' purposes, a score of 700 and higher is usually considered good, whereas a score of 600 or lower is considered bad. Not all states will use credit rating as part of determining your auto insurance rates, but the Federal Trade Commission has approved of the technique as leading to an increase in the accuracy of underwriting policies. The use of credit ratings in this manner is in dispute in a number of states, and some of the states that do use credit ratings are legally required to inform applicants if their credit rating has resulted in an adverse decision on their policy.

How to Use Your Credit Rating When Purchasing Auto Insurance

When you first set out to buy a policy, you should find out if credit rating is a factor in your state. If it is, you should find out your credit score through a credit reporting agency. If your score is below 700, you should consider taking steps to raise your score before buying an auto insurance policy.