Do Car Insurance Rates Depend on Your Credit Score?
From financial strategists, it has become increasingly clear that credit scores play a significant role in how insurance companies determine car insurance rates. Insurance companies often assume that individuals with higher credit scores are more financially responsible and less likely to file claims.
This article aims to clarify whether your credit score indeed impacts your car insurance rates, and if so, how much of a role it plays.
The Role of Credit Scores
The quick answer is a resounding Yes. About 60% of an insurance company's decision to either offer you a policy or determine your rates is based on your FICO credit scores. This might seem counterintuitive to many, as driving behavior and accident history are typically the primary factors considered. So, how can your credit score—essentially a measure of your financial responsibility—have any bearing on your driving abilities and risk profile?
The key lies in how insurance companies assess risk. They use a metric known as the Credit Bureau Insurance Score (CBIS) to evaluate the likelihood of you filing an insurance claim. Over time, the insurance industry has recognized a pattern: individuals with lower credit scores tend to file more claims. This correlation means that a person with a higher credit score is statistically more likely to be a less frequent filer of claims.
Understanding the CBIS
The CBIS takes into account various factors from your credit report, such as payment history, credit utilization, credit mix, and length of credit history. Essentially, it reflects your overall financial responsibility and reliability. Insurance companies use this score to predict the likelihood that you will file a claim in the future. For example, if you have a history of late payments or defaults, your insurance company might view you as a higher risk and charge you higher premiums.
However, it's important to note that a higher credit score is not the only factor. Other factors include your driving history, age, location, vehicle type, and even the time of day you drive. Your credit score acts as a secondary indicator of your risk level.
The Benefits of Improving Your Credit Score
The good news is that improving your credit score can significantly lower your car insurance rates. Let's take the example of a client who starts with a sub-prime FICO score of 520. Within six months, this client's score could rise to a prime FICO score of over 630. This score boost doesn't just benefit them with better car insurance rates; it can also qualify them for lower rates on home insurance and other forms of insurance as well.
To experience these benefits, all you need to do is call your insurance agent and request a policy rewrite. This soft pull of your credit score will provide updated information, and your rates may significantly drop. Many people find that they are able to dramatically reduce their car insurance premiums and even secure better rates on home and other forms of insurance as well.
Whether you're just starting or looking to improve your current situation, your insurance agent can help you navigate this process. It's never too late to start seeing the benefits of a higher credit score in your financial life.
How to Test the Information
If you're curious about the impact of your credit score on your car insurance rates, you can easily test this information with your insurance agent. By calling your agent and requesting a policy rewrite, you can see if your updated credit score qualifies you for lower rates. It's a straightforward and effective way to understand the connection between your credit score and your insurance premiums.
To summarize, while your driving history and accident records are crucial, your credit score can also play a significant role in determining your car insurance rates. Improving your credit score can lead to significant cost savings and more comprehensive insurance coverage. So, consider reviewing your credit report and taking steps to improve your credit score, as it can benefit you in multiple aspects of your financial life.