September 1st, 2010
Traditionally, car insurance providers placed a strong emphasis on characteristics like driving record (accident/violation history), age and geo-location. While these factors are still weighed heavily, most auto insurance companies now consider your credit rating the strongest predictor of your likelihood of making a claim. As a result, they are pricing their policies accordingly.
This strategic shift by insurers actually favors drivers who may have a few blemishes in their driving record but maintain a good credit score. Conversely, drivers who have kept a clean driving record, but have a spotty credit history will be penalized. Unfortunately, as a consumer you think you are insuring your car, while insurance companies look at it as insuring the driver.
It is important to note that some states, such as California, prohibit the use of credit by car insurance companies when pricing your policy. In those cases, the traditional pricing variables will be weighed more heavily.
Why do banks and insurance companies use credit scores? Most think that credit scores are a good indication of an individual's future, payment-wise. Credit scores are essentially a persons' credit "worthiness", they show who is a bad investment and who is a good investment. But what exactly goes into figuring out an individual's score? FICO is the most commonly used by lenders. In FICO's calculations, it is broken down into five categories; 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and 10% types of credit used.
So if you know you're going to be in the market for a new car insurance policy it may be best to pay down some debt beforehand, as to save money on your monthly premiums. Easier said than done, right? But paying off debt may save you money in the long run. You can even think about your credit card payment as an investment in the future. FICO has a site that will walk you through credit scores, showing U.S. averages, your state's average, and your score, along with more information about your score. Check it out at myfico.com Make sure to check your credit score out before shopping for a new insurance policy.