It is interesting to note that a driver who never hand an accident and has never filed a claim could pay as much as three times for auto insurance as another driver with similar records and vehicle – just because of the difference in credit scores.
Credit Score & Insurance rate
Many
auto insurance companies follow the system of charging high rates for customers with poor credit scores. They charge the customers with poor credit three times the rate they charge for customers with high credit scores. So it is clear that credit history is one of the major factors on which the auto insurance rates are determined.
The reason for using credit score to determine the
cost of car insurance is that this idea is based on a study that says that customers with poor credit histories are more likely to get involved in accidents and more likely to file claims. This makes them high risk customers and they must be charged higher rates for their
auto insurance policies. Many other studies have confirmed the strong relation between credit history and auto insurance and home owners insurance. It is assumed that people who are financially irresponsible and get into bad credit history have a greater chance of getting involved in accidents and to file claims.
When it comes to cost of car insurance, having a good credit score will help you to reduce the cost of your auto insurance. Insurance companies try to segregate the customers who will provide maximum profits. This directly translates into fewer claims. All auto insurance companies use the credit information of the individual to decide if he can be issued a policy and if so, at what rate of premium. The calculation is based on the credit score of the individual.
Insurance score
Like FICO score from credit reporting agencies such as Equifax, Transunion, and Experian, insurance companies use a certain formula to arrive at a customer’s insurance score. Insurance score is a numerical ranking for the purpose of predicting the claim behavior of the person. After applying this formula the customer with poor credit score finally and certainly gets a poor insurance score. This score is used to determine the amount of premium that has to be charged. Insurance score takes into account things other than credit scores. People with poor insurance scores are found to file more claims. The focus is on the person’s financial stability that can have an impact on the person’s claim behavior. Insurance score helps the insurance company to differentiate between the drivers who are high risk and who are not and price their policies accordingly.
Cost of car insurance
In addition to the practice of basing the
premium rates of auto insurance to customers based on their credit scores, there are many other parameters that go into the calculation of the cost of insurance of a person. They are the geographical location, age and gender, credit score and insurance score, previous crashes and previous insurance details that are taken into consideration while calculating the price of the car insurance policy. The outcome is that the people who are less likely to make a claim will get a lower rate than the others.