Your Credit Score Can Determine Your Auto Insurance Cost

You collide with another car; your auto insurance company probably elevates your premiums. But you may not know that your premiums can shoot up a great deal higher if your car insurance company is using a new breed of credit score, even if you've a pristine driving record.
 
Known as credit-based insurance scores, these numbers are calculated from your bill-paying and loan data amassed by the major credit bureaus. In recent years, the scores have become as significant in determining your annual premium as your driving record and the neighbourhood where you live.

100s of insurers are using models created by ChoicePoint and Fair Isaac, the Minneapolis company that invented credit scoring. Others have evolved their own systems. The scoring models emphasis bits of credit data that would seem to have little to do with a driver's disposition to make claims. There are no standards:

Each company uses different models and weighs different credit-report information. Some large companies find scoring of value only for new customers, not renewals, while others may use it for both.

Auto insurers use this credit information to develop an "insurance score" because they believe it allows them to more accurately assess and price a risk. In conjunction with other data such as years of driving experience, past accidents, the type of auto or home, and where the driver dwells and drives, credit-based insurance scores permit insurers to differentiate between lower and higher insurance risks.

These scores are not a measure of someone's fiscal assets, but of how you as an individual handle your financial affairs. Insurance scores are alleged to be highly accurate forecasters of future loss in car insurance. The statistical correlation between good credit and comparatively low insurance losses presupposes that the responsibleness needed to prudently manage one's finances is connected with other types of responsible and prudent behaviors, such as proper maintenance of homes and autos, and safe operation of cars.

Many recent studies substantiate the strong correlation between credit history and loss in both auto and homeowners insurance. Neither insurers nor the credit-scoring companies that discovered the relationship know what causes it. It is believed that by and large people with a pattern of irresponsible financial behavior and poor credit history have larger chance of being in an accident or filing a claim. But the other studies, such as the Monaghan study, which reviewed those long-standing inferences, say that links between responsibleinancial management and future expected losses are "unsupported." Either way scoring could cost you hundreds of extra dollars. Even a driver with a marvellous credit score, who rates a low-interest mortgage, could wind up with a less favorable insurance score and thus a high premium. That's because formulations for insurance scores consider credit data differently from traditional lender scores. There is a way to check. Under the Fair Credit Reporting Act of 1970, insurers are required to notify consumers if they experience adverse action, such as denial, premium increase or cancellation of coverage, due to information contained in their credit report. Consumers also have the right to have errors in their credit report rectified and can request that the insurance company recalculate their insurance score and reevaluate their insurance coverage and premium.