A late payment on one account could cost you higher rates and fees on all of your accounts – from your credit cards to your auto insurance.
Many auto insurers use statistical analysis to determine that people with bad credit are more likely to file claims, so are using credit data to help determine your insurance rates. Considering that according to research by the Insurance Information Institute drivers at the bottom of the credit heap file 40% more claims than drivers who are at the top, this makes sense.
Following the 2001 publication by Conning, an insurance research and asset management firm, of a professional survey which showed that ninety-two of the 100 largest personal auto insurance companies in the United States use credit data in underwriting new business – the U.S. government began to express interest in the practice. Their 2007 report Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance gave legitimacy to the practice.
Because of this an increasing number of companies began exploiting credit reports for justification to increase their client’s interest rates or to provide cause for them to say no to a requested higher credit limit.
This could be described as the socialization of debt information – as now when lenders see someone become delinquent with another creditor, they see that as an indicator that the borrower is about to become delinquent with them.
The impact of this is significant – having blemishes on your credit report could really inflate your auto insurance rates. Consumers with poor credit can pay up to 50% more in auto insurance premiums than individuals with good credit.
What is an insurance score and why should you care?
Your auto insurance company doesn’t actually peek at your credit report. Instead, it receives an insurance score from a credit bureau based on the information in your credit record.
Like a credit score, an insurance score is based on information found in a consumer’s credit file. But the formulas used to arrive at the two types of scores are quite different.
An insurance score is going to be less concerned with your likelihood to take on new credit and more interested in how long you’ve been managing credit. If you’re curious to know your insurance score, you’re out of luck. Insurance companies aren’t required to tell you and often won’t.
Even if you could find out your insurance score, it might not be helpful. Yes, it could give you a sense of how a single auto insurer rates your credit record, but that’s it.
Bottom line: Your credit record affects the cost of your auto insurance.
If you’re having credit problems, you should consider staying with your current auto insurance carrier until your record improves. If you must shop for a new auto policy, ask the insurer if they use credit data in their decision-making process. Not all companies do.
How to protect yourself
There are easy ways to reduce your chance of making a late payment and having your credit report tarnished:
- Keep a list of all accounts, due dates, balances and credit limits and review it often
- Get in the habit of paying bills as soon as they arrive
- Monitor all accounts carefully
- Check your credit report at least once a year and correct any errors
