Credit Scoring and Auto Insurance

Credit Scoring and Auto InsuranceYou probably already know that credit scoring is used to determine whether or not you qualify for a credit card, car loan or to rent an apartment, but did you know your credit score can affect how much you pay for car insurance?

The practice of credit scoring - what insurance companies call it when they rate your credit profile, can be disastrous for any consumer whose credit is less than pristine. Across the country, car insurance companies are basing the price of your premium - at least in part - on your credit score. If yours is too low, the cost of your new auto insurance coverage could double, and even if you're already a loyal customer just two missed credit card payments could lead to more expensive insurance at renewal time, even if you've never made a claim against your policy.

Why Does Your Credit Score Matter

You may wonder why an insurance company even cares about your credit score. After all, they're not extending a line of credit to you. The reason is that insurers believe that people who are irresponsible with money or debt are likely to be irresponsible on the road as well.

Donald Hanson of National Association of Independent Insurers made that sentiment clear on national television when he was interviewed for a story about his industry by CBS reporters. In the interview, he said, "Research indicates that people who manage their personal finances responsibly tend to manage other important aspects of their life with that same level of responsibility and that would include being responsible behind the wheel of their car or being responsible in maintaining their home."

Of course, not everyone agrees with Hanson. Some people feel that relying on credit scoring to determine car insurance premiums makes things worse for people who may already be struggling.

Is Credit Scoring Unfair?

Even though many insurers are in favor of credit scoring, there are many who feel that doing so is unfair, and even discriminatory toward members of the working class. This is because a significant number of blue collar workers have lower credit scores. The current state of the economy, opponents of the practice point out, has caused a lot of strain for working class Americans, who may miss a few credit card payments here and there while trying hard to provide their families with basic necessities like housing, food, and clothing.

There is also the issue that not all parts of the United States have public transportation, which means adequate auto insurance is an absolute necessity, especially since lack of health insurance could be an issue if there's a serious car accident. For these people, the increased cost of credit score-determined car insurance could just put them even further behind.

Is there a solution to the credit scoring dilemma? It's easy to tell people to keep their credit clean, but that isn't always possible. The good news is that many insurers will re-check your credit at renewal if you ask, and if your scores have improved, your rates will as well.