Car Insurance Companies Using Credit Scoring

Posted on: February 6th, 2011 by admin

Stack of credit cardsMany motorists may not think that there is much of a relationship between their credit score and insurance rates. In reality, however, there are many states that believe there is a direct correlation between the two. Theoretically if a person has a poor credit score it could potentially mean that they would be more apt to taking risks than someone with a higher score, and would therefore be considered a person who is more likely to take unnecessary risks while driving. In order to cover their own potential losses, providers would then either increase rates or simply deny coverage. Sometimes, a coverage provider will evaluate a person’s credit score when they are scheduled to renew service to determine whether or not to increase their prices. This practice, however, is sometimes frowned upon, and in some states it’s illegal.

The process of altering a person’s premium based off of their financial history is also referred to as Credit Scoring. In many states, such as North Dakota, it is required by law that a coverage provider disclose that they will be checking one’s scores so that the customer is aware of what is going on. As previously mentioned, however, in several states it is illegal for auto insurance companies to use a person’s credit score as the sole reason to deny a motorist coverage or increase their premiums. In Oregon, a policyholder’s credit information cannot be used to increase premiums on an existing policy, used to refuse a customer’s renewal of coverage, or utilized as the sole deciding factor in whether or not a policy is issued to a new customer.

Studies Support Insurance Companies’ Credit Score Use

For many years insurers and various research facilities have done extensive studies to determine whether or not one’s credit score has any relation to the amount of insurance claims that a person files in a given time period. In July of 2007 the Federal Trade Commission (FTC) released a report to Congress regarding Credit-Based Insurance Scores which detailed the link between financial histories and potential driving risk factors. Oddly enough the FTC was able to find definitive proof that there is link between having a low credit score and having an increased likelihood of filing a claim, but was unable to pinpoint exactly why such a link exists.

Because there are many different details that go into deciding a person’s insurance rates, providers strive to determine the best way to generate an accurate number based off of previous studies and future speculations. Although inspecting ones credit seems irrelevant to some, at times it has resulted in more accurate predictions regarding a motorist’s risk factors. These numbers, however, can be used to help drivers as well. Motorists that keep their credit history in good standing can be rewarded with lower rates, which can help a policyholder maintain low premiums with their carrier.


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