Insurance And Your Credit Report (Part I)
Knowing how and when credit-related events can affect your insurance rates is important because it can impact your driving habits. Depending on the type of insurance you carry, these events may or may not cause an increase in premiums, but it pays to understand the correlation between credit scores and auto insurance rates.
We'll get into this topic in greater detail later on as we publish more blog posts about what specific events lead to a rising or declining credit score. For now, let's review a few general factors that affect your credit score and their corresponding insurance impacts:
- The age of your account; newer accounts will have lower scores than older ones with more established histories.
- The number of inquiries and subsequent credit bureau check requests: Inquiries lead to an immediate drop in your score to as low as 25 percent, while requesting a report can appear only on your report for 60 days and cause a drop of up to 32.6%
- Amount owed: Accounts with large balances immediately decrease their score by 12.9%, down to a minimum of 18% if the account is opened for 3 years from the date acquired.
- Length of credit history: A longer history will result in lower premiums but may also indicate higher risk for auto insurance.
- The number of revolving accounts: In general, credit card holders are viewed as higher risk than those who hold only one or two accounts.
This information should be a starting point for you as you either apply for auto insurance and/or work to improve your FICO score. You should also arm yourself with other credit-related information like the factors that determine your score and tips on how to raise your score. One of our most popular articles is How Your Credit Report Affects Your Auto Insurance Premiums , which is another good place to start if you are looking to learn more about the impact of credit scores on auto insurance premiums.
Next we'll look at the influence credit history has on auto insurance rates…
~Auto Insurance Team~
Title: Insurance And Your Credit Report (Part II)
In our last post, we learned a little about how credit scores can affect your auto insurance premiums. Today we're going to pick up where we left off in that article and explore the connection between poor credit and higher premiums. This first example refers to a hypothetical scenario where the individual has no accidents or violations: ...Let's say you're an auto insurance agency owner considering three applicants for coverage: 1.) The 22-year old who has had a clean driving record for three years but has a 580 credit score 2. 3.) The 50-year old who has been driving for twenty years and has no accidents or tickets, but has a credit score of 695. 4.) The 30-year old driver who has had an accident in the past three years and received a speeding ticket that happened two years ago. This individual holds a credit score of 730. Which policy will you price high and which will you price low? Choice one would likely be the 22 year old with the 580 score, because at that age there's little else on his report to determine his risk other than his credit score. A low credit score shows that he may have trouble paying bills and could be a higher risk than someone with better assets or collateral (like someone who owns his home). For choice two, you would price the older individual's policy in the middle because he has a good driving history but a weak credit score. You can't determine his risk for accidents and violations because he has no recent history on his record, so you'd want to price this individual's policy in the middle of your group. The 50 year old with 695 credit score gets the same treatment as choice two. Choice three is the most interesting case because it shows a driver who is both high risk and high reward. The driver's history shows an accident with a ticket three years ago, but his credit score shows that he's responsible with his payments. He may have a higher risk for accidents and violations than the other two drivers, but he also has a stronger ability to pay if anything goes wrong. The final applicant - the one with the good credit score - has no accidents or tickets on his record, which brings down his risk level. Although this driver is in better shape than choice three, there is still some risk factored into his premium because of the accidents and tickets on his record. Depending on how much weight you put into credit scores as a factor for your customers' auto insurance policy will determine how much you charge them going forward.
The majority of consumers will end up paying the higher rate on choice two given the lower score of choice one. The driver who received a ticket in the past three years is considered a high-risk driver by you, but his record shows that he has paid all his tickets in full and that he hasn't been into an accident in three years. He will likely pay a higher rate than someone with many accidents or tickets, even if this person has worse credit.
As you can see from this hypothetical example, using credit scores as a factor in your auto insurance policies isn't always black and white. The main issues to consider are the number of accidents and tickets on a driver's record, their credit score, and their age. There are many other factors like gender, where you live, race and marital status to take into account when determining rates for your auto insurance policies.
As we mentioned in our previous post , credit scores can be an effective way to price your auto insurance policies because it's a measure of how financially responsible an individual is. However, it's important to evaluate the weight you place on your customer's credit score so that you don't overcharge a good driver who simply has poor credit. We hope this post helps you to make more informed decisions about your auto insurance policies.
Your Turn: How important is a driver's credit report to you? Which factors would you consider when pricing auto insurance? Any other tips for evaluating credit records? Please leave your thoughts in the comments below!
~ Auto Insurance Team~
Title: Insurance And Your Credit Report (Part I) In our last post, we looked at the impact of credit scores on auto insurance premiums. There are many factors that play into determining an individual's car accident and violation history, including age, gender, driving experience and past behavior . We also discussed the influence of bad debt on an individual's FICO score .
Conclusion:
According to the article, there are several different factors that go into determining an individual's car accident and violation history. The biggest factors to consider are:
Age - Young drivers in their late teens and early 20's tend to show a higher number of accidents and violations than older drivers because they often don't have the experience or skill level required for safe driving.
Gender - Men tend to be higher risk drivers than women because they are more likely to participate in risky behavior behind the wheel, such as speeding, impaired driving, and excessive speeding.
Experience - A driver's level of experience is also a big factor that can determine his rate class.