What does credit have to do with insurance rates? I do not see the correlation.?

Question

My credit is o.k, it is not the best and it is not horrible. But I have not one ticket or accident on my driving record. I haven't had a ticket for at least 6 years now. However, my rates are higher than another guy who has good credit, but has 2 at fault accidents and 1 speeding ticket. Plus comp and collision claims. I guess I don't see the picture?

Answer 1

From your credit report lenders can gage how likely you are to pay or miss a payment. If you are considered a risk, they will charge you more to compensate for them taking a risk. Employers, landlords and others also factor in your credit.

If someone cannot manage money well in her personal life, why would a anyone do a business transaction with her? Best thing for you to do would be to pay off your credit cards, NEVER be late on a payment, and learn other ways to bump up your FICO. You'll get better treatment (ie., interest rates) from everyone.

Answer 2

The insurance companies use credit the same as credit companies do to gauge your ability to pay but they also look at as a gauge to the propensity to get in an accident. The insurance companies beleive that people with less than stellar credit are a higher risk than a person with stellar credit
It is screwed up because the less credit you have or the less good credit you have they charge you more.
I think it is a bunch of crap and speculation but they have to cover their profits and losses.

If you don't understand this wait till you have your insurance hiked because they searched you on MySpace and you had a picture of you drinking a beer at a party or a potential employer doesn't hire you for the same reason.

Answer 3

The credit score used by insurance companies is not quite the same as the credit score used by lenders. It focuses on certain areas that they won't disclose. But, generally, if you have a poor financial credit score, your insurance score will also be low and insurance companies will consider that you are more likely to submit a claim than someone with better credit.

In other words, your insurance rates are based on the likelihood of your submitting a claim as a result of your own negligence, at-fault accidents, fraud, or financial ineptitude. Even if a claim is turned down, it still costs the insurance company money to investigate it and process it.

Answer 4

Well, you can't really compare you and this other person. Does he have the same company- is his age different than yours, or marital status? Does he carry lower liability limits and higher deductibles? Maybe his company is offering him accident forgiveness. Could be anything. You can't really say unless you have all the facts.

There is a correlation betwen credit and risk. However, occasionally there will be a horrible driver out there who manages to pay his bills on time and have a good score. That is probably the exception. That's why insurance companies, when they are allowed to, use credit as something that helps them determine rates.

Answer 5

Your auto insurance is paid out over time. They are, in a sense, extending credit to you. If you have a poor credit history, this indicates a risk of you paying on time and/or paying at all. So.. let's look at it from the Insurance Companies point of view when looking to insure Joe Bloke the credit risk.

Joe comes in and get's a quote of $1,000. He agrees to the amount and then pays his down payment of 15% or $150. The remaining 85% ($850) is then spread out across the 6 month policy term and comes to about $142 per month. Now there are laws that govern the cancelation of insurance policies. These laws state that the insurance company must give 30 days notice to cancel for any reason. Soo.. time passes.... Joe's first payment is due 30days after his original down payment was made and he has a 5 day grace period. On the 6th day pass due, the insurance company sends out a notice of cancellation. This notice gives Joe an additional 30 days to pay or be cancels. Joe doesn't pay... which doesn't surprise anyone because of his bad credit. The insurance company then cancels Joe on the appropriate date. This gives Joe insurance coverage for a period of 65 days for a single payment of $150. Should Joe have an accident the insurance company must pay in full even if Joe did not make any payments beyond the initial down payment.

Should Joe jump from insurance company to insurance company he can effectively get the same 6 months of coverage for only 3 payments of $150 ($550) instead of the $1,000 risk cost that he is.

I know it doesn't sound fair, but from a purely business risk view, it's the only thing an insurance company can do to protect itself from unscrupulous customers.

Hope this clears the water a bit for you.

Answer 6

Insurance is credit-based. Basically, insurance companies use it as a method to determine the risk in allowing you to be insured with them. There has been research that shows a direct correlation with credit ratings and insurance claims. Beats me how they figured that out. Also, an insurance company is not legally allowed to run a credit check on you - my company uses a letter A-Z as representation for your credit score, however it does not show as an inquiry on your credit report. Hope that helped.

Answer 7

Everythings goes by your credit now days.If you don't have the best credit you'll pay more for insurance.Call your agent and ask them to look over your policy and they should be able to find discounts they can add on or most insurance companies have different driving classes that they rate people under.Maybe they can switch you to a different part of the company and rate you under a different driving class.

Answer 8

Not only can poor credit drive up your insurance rates, it can make your life miserable in other ways. In addition to insurance companies, people or businesses can requests copies of your credit file when they plan to use your credit information to extend credit to you, consider offering you employment, rent you a place to live and determine child support payments.

If you have bad credit, fix it. If you don't have bad credit, don't do anything to make it bad.

Answer 9

unfortunately credit doesn't. What insurance companies figure though is that if you have less than perfect credit then you are more likely to have a claim...it's not fair but that's what they use as criteria. Many employers are going to looking at your credit when considering you for employment too. Again..not fair but that's what they do.

Answer 10

Get used to it. Your credit can determine almost everything today.
How much you pay for car insurance is just one of them. Others could be how much interest you pay on a credit card or a mortgage. If you get a job or not, Even landlords check your credit.