Credit History and Auto Insurance Premiums: What’s the Connection?

Increasingly, consumers are asking why their credit rating affects the rates they pay for automobile insurance. Yet using an individual’s credit rating as a criterion for determining an auto insurance premium is a fairly common practice in the insurance industry. Why? Statistics compiled by the Insurance Information Institute indicate that drivers with low credit scores are more likely to file insurance claims. As a result, the lower a person’s credit score, the more likely it is that the individual will pay higher auto insurance premiums; conversely, the higher the credit score, the lower the insurance rates.

When using credit scores to set automobile insurance premiums, insurance companies consider a number of elements in an individual’s credit history. The two most important factors are an individual’s payment history and the amount of debt the individual owes. Insurers want to know whether an individual has made late payments or has missed payments, as well as whether he or she is paying down or accumulating debt. Other criteria are the length of an individual’s credit history, the number of accounts in an individual’s credit report, and the amount of new account activity in the report.

Many consumers feel that the practice of using credit history and not solely an individual’s driving record in determining auto insurance premiums is unfair. They argue that it’s wrong to charge higher rates to individuals who have not had any tickets or accidents for many years but who have lower credit scores. Yet drivers with multiple tickets or at-fault claims pay lower auto insurance premiums merely because they have excellent credit ratings. Insurance companies claim that using credit history is a proven tool that helps them measure their risk of loss and set their rates accordingly.

Given the current economic climate, with high unemployment and a record number of mortgage foreclosures, even individuals who once had good credit history may find themselves facing double trouble: mounting debt and higher auto insurance premiums. That’s why now more than ever, consumers need to work with insurance professionals committed to getting them the best automobile coverage at the best price.

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