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Car Insurance: Why Your Credit Score Matters

It’s a given that issues like age and driving record impact auto insurance premiums, but insurers are increasingly as likely to include a driver’s credit score when calculating a policy rate.

Is it fair? No. Is it legal? In many states, yes.

Some new data from Edmunds.com sheds new light on the link between credit health and auto insurance premiums. And Edmunds is hardly alone. CarInsurance.com has its own study out concluding that drivers with a credit rating higher than 750 pay, on average, $783 less per year compared to a driver of the same age and income bracket, but with a sub-700 creditscore. That study says a 25-year-old driver with good credit can save $22,815 on auto insurance premiums by the time he or she reaches retirement age.

For its part, Edmunds says that some auto insurance companies definitely look at credit scores before deciding on the premium they offer, but that doesn’t mean all companies engage in the practice.

Allstate (Stock Quote: ALL), for example, doesn’t use credit scores at all in providing policy quotes. Other companies, like Progressive Insurance (Stock Quote: PRG) may use credit scores if consumers decide to pay via an installment plan. But if you’re a Progressive customer who pays the entire premium up front, no credit score is used, and that’s a standard many insurers adhere to.

“Many people know that their driving profiles and personal information – like age and occupation – are factored into insurance rates, but they’d be surprised to know that some insurance companies will dive this deep into their financial affairs,” says Edmunds.com spokesperson Carroll Lachnit. “It’s been the subject of some controversy, and it’s been challenged by many state legislatures, with seven states passing laws last year restricting the practice.”

Maryland, Texas and Michigan, for instance, all have laws on the books restricting the practice in some form or another. But if you live in a state where no such laws exist (check with your state’s insurance commission to be sure), what steps can you take to dodge the credit report bullet on your car insurance?

Edmunds recommends these tips:

  • Take the “pay as you drive route.” Edmunds says that if you’re amenable to giving up some privacy, insurance companies “can set lower rates based on telematics that monitor your driving behavior.” It’s a bit Orwellian, but the small devices that plug directly into your car’s technology system can measure things like driving speeds and frequency of use – issues that can drive an insurance policy cost way up or way down, if you’re a safe, infrequent driver.
  • Flip your policy. If you’re OK paying a higher deductible in case you are in an accident, you might get discounts on your premiums that would drive the total cost of your policy lower.
  • Ask for price breaks. Edmunds says that Insurance companies offer discounts based on a variety of factors, from low-mileage driving, to using anti-theft and tracking devices.

Dealing with auto insurance is difficult enough without having to worry about your credit score, but if you get creative and have some flexibility, it’s a problem that can go away fairly easily.

It’s a given that issues like age and driving record impact auto insurance premiums, but insurers are increasingly as likely to include a driver’s creditscore when calculating a policy rate.Is it fair? No. Is it legal? In many states, yes.

Some new data from Edmunds.com sheds new light on the link between credit health and auto insurance premiums. And Edmunds is hardly alone. CarInsurance.com has its own study out concluding that drivers with a credit rating higher than 750 pay, on average, $783 less per year compared to a driver of the same age and income bracket, but with a sub-700 creditscore. That study says a 25-year-old driver with good credit can save $22,815 on auto insurance premiums by the time he or she reaches retirement age.

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Written by lordsinsurancelog

July 20, 2011 at 8:36 pm

Posted in Insurance News