Why Am I Paying So Much For Auto Insurance?

Your Auto Insurance Rate Could Be Lower

A new trend is beginning to be established amongst large insurance companies in the US. It has been long known that insurance companies, especially auto insurance companies, have used different factors to decide the price of your premium. Age, sex, length of time driving, driving history and choice of car have all been used to decide how much you pay each month, but recently insurers have adopted the use of your personal credit score as an indicator of risk. In short, your financial history could play a part in in determining how insurable you are.
The way that these insurance companies justify taking your credit score as an indication of your auto insurance risk, is that they look at your attitude to money and spending as an example of your reliability in general. They feel that if you are late in paying something as important as a mortgage, car payment or any other debt, then you may not be able to pay your insurance premium each month. The car you want to insure is one risk that is taken into account, your ability to pay is now another.

Your Credit Score Affects Your Rate

Customers with a low credit rating theoretically pose a higher risk of defaulting, or continually offering delayed payments so the premiums are increased to offset the cost. Some insurers also allege that customers with a low credit score are more at risk of a claim than those with high scores. This double whammy means that if you have damaged credit that your premium could be much more expensive and dictate the type of car you choose or even if you have one at all. This is difficult as those with a lower credit score will have to pay more each month, and they are usually the ones who can least afford it. A lower credit score is often an indication of a major life change such as a divorce or job loss rather than being reckless with credit.
International Autosource did a survey to see how much each state weighted the auto premium of a person with a bad credit score. They invented two personas which were exactly the same, with the same types of cars, the only difference being one had a good credit rating between 650-749, and the other had no credit rating at all. The image below shows how much the customer with the low credit score paid over the premium for the customer with a good credit rating.
auto insurance premiums infographic image
You can see that in some states a premium can be over twice as expensive for someone with low credit rating than someone with a good credit rating. That’s a huge difference. Other insurance premiums can be affected by credit scores for the same reasons.
There is an upside to this insurance equation. If you have a good credit score the likelihood is that your insurance premium will go down as you are less of a risk and as the premiums are worked out every year based on your current factors, and that’s good news. The more that you can improve your credit score the quicker your auto insurance premium will reduce.

There are four different types of driver categories when credit scores are taken into account. They are:

  • good drivers with good credit
  • bad drivers with good credit
  • good drivers with bad credit
  • bad drivers with bad credit.

The first category is the best to be in as these are the most likely to receive what could be a healthy discount. Those with a bad driving history but good credit and those with a good driving history but bad credit are very similar in calculated risk, so will probably get a small discount or increase depending on circumstances. Those with a bad driving credit history are in the most difficult situation and are likely to see an increased premium. If you want the most affordable auto insurance, it’s simple, the best thing to do is to increase your credit rating.

By working on your credit you can save money on your auto insurance and maybe even other premiums. Either way, you’ll have more money to enjoy each month.

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