Americans whose credit score took a beating from the recent financial and mortgage meltdowns may have another worry on their plates – rising auto insurance rates.
While it is pretty much common knowledge that a sports car is more expensive to insure than a family wagon or that teenagers are usually charged more for auto insurance than thirtysomethings, unbeknownst to many consumers is that their credit history – which is a record of all their credit activities, good or bad – also determines how much they pay for auto insurance.
And a driver’s weak credit score is likely to produce one of three scenarios: a driver’s auto insurance rate is raised, their auto insurance policy is canceled or, in the worst case scenario, a driver is refused auto insurance. Typically, a weak credit score falls under 600 on a scale of 850. Drivers with good to excellent credit scores are above 700 on the same scale.
Auto insurance companies use a driver’s credit history to determine how diligent a driver is when it comes to paying their debts. Additionally, insurers assume consumers with good or excellent credit scores are less risk to insure and less inclined to file insurance claims so they will typically offer them the best rates and offers.
Unfair or not, those drivers with weak credit scores are deemed less likely to be able to pay for damages in the event of a wreck and more likely to file an insurance claim with their insurance provider. And in the unfortunate event that a car wreck does occur and auto insurance rates rise, insurers assume that drivers with better credit are better able to handle the premium increases.
So regardless if a driver has an unblemished driving record, a dip in credit scores could translate into a rise in hundreds of dollars to their insurance premiums.
And drivers looking for the top premiums will get a good picture of how auto insurers use a driver’s credit history and scores. For example, some insurers only look at a driver’s credit history for last year while others may go back as far as two to five years. Others still may only look at the driver’s credit score.
But using a driver’s credit history or scores in determining insurance rates is restricted by many states. And many of them require insurance companies to tell drivers if poor credit scores led to higher premiums. Many states also prohibit auto insurance companies from using credit information as the only factor when it comes to rates.
For example, in the Lone Star State of Texas, auto insurance companies can’t use the lack of credit history to be used when determining rates. Also, unusual circumstances that could take some luster off a good score like identity theft need to be accounted for by insurers when determining a driver’s insurance rate.
Kansas, New Mexico and Montana have legislation that puts the brakes on using insurance scores when a rating a driver. An insurance score differs from a credit score in that it’s compiled from elements of a driver’s credit history that insurers have deemed useful in determining losses. Elements of this score include bankruptcy history, payment history and credit history length.
In Michigan, insurers are required annually to recalculate insurance scores, as well as when a driver successfully disputes derogatory or incorrect information on their credit record.
Some states are even more restrictive. For example, Washington State bans auto insurance policy cancellations or not renewing policies because of derogatory credit history information. And insurers operating in the state also can’t deny coverage or set high insurance rates because of collection efforts for delinquent medical debts, a driver’s lack of credit or a high amount of credit history inquiries.
In Maryland, state law caps credit-related discounts or additional fees and the Golden State of California took credit history out of the equation in determining rates; Hawaii also prohibits using credit reports when it comes to auto insurance rates.
So while some states are more restrictive than others when it comes to using credit history to set rates, it would behoove drivers to be cognizant of their state laws regarding consumer credit history and how it affects auto insurance rates.
Another way drivers can educate and protect themselves is by checking with their insurer if credit history plays a factor in how they set insurance rates. Drivers can also review their credit report for any derogatory or incorrect information for free by requesting a free credit report from the major credit bureaus in the Nation. Any errors on the credit report should be addressed to the credit bureau listing the incorrect information. Keeping the bills paid on time also helps.