Car insurance pricing based on your credit score - sort of

Auto insurance pricing is a bit cryptic to most consumers. They have no idea how insurance pricing is derived; they just know that companies usually want more money than they would like to pay for the product. It certainly makes sense that consumers who have had a history of unsafe driving might pay more for their car insurance than those with a safe driving record. And buyers in Los Angeles or Houston might have to pay more for insurance than drivers who live in Fargo or Butte. These things make sense. Many consumers might be surprised, however, to see how much their own credit score affects the price they pay for their car insurance premiums.

On the surface, there would seem to be no correlation between your financial status and your driving habits. But insurance companies are increasingly turning to the FICO score created by Fair, Isaac and Co. when deciding how much to charge their customers for the product. In the mid-1990’s, insurers discovered that there seems to be a link between low credit scores and the likelihood of a driver being in an accident and filing a claim. No one has yet established exactly what the link happens to be or why it exists, but companies have noted that it does, indeed, exist.

That being the case, you are likely to pay a lot more for your insurance if your credit score is below 630 than you are if your score is above that figure. In fact, in some cases, a low credit score can cause your premiums to double.

The system used by the companies is far from foolproof; some companies use their own scoring systems that penalize you for applying for credit three times in a year, despite the fact that doing so might not be an unreasonable thing to do from a financial standpoint. Studies have also shown that while most, if not all, companies use credit scoring to determine their pricing, that pricing can still vary widely from company to company.

This has several ramifications for consumers who want to pay as little as possible for their insurance:

• Keep an eye on your credit report and score. You should check it regularly to make sure that there are no errors that reflect poorly upon you. Errors or not, your insurance provider will use that as an excuse to raise your premiums.
• Fix your credit - If you have problem credit a history of financial trouble, do your best to pay off your debts and keep your bills current. The sooner you improve your credit score, the lower your future premiums will be.
• Shop around - While all companies seem to use credit scoring to determine pricing, the prices are still all over the board. A bit of shopping around will still help you find the best price on your insurance.

The methods may be a secret, but the bottom line is not - better credit gets you better prices.

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