How Much Influence Does Credit Score Have on Your Car Insurance Bill?

NEW YORK (MainStreet) — Premiums for your car insurance can vary widely depending on how much your company uses credit scores to determine them.

While all insurance companies examine your credit score to determine your premium as part of their assessment of your risk, some of them place a greater weight in it.

Allstate appears to utilize credit data the most, according to an analysis by WalletHub, the Washington, D.C.-based personal finance social network. The company's research showed that there can be a 116% fluctuation in premiums between a consumer with excellent credit and a consumer with bad credit. On the flip side, State Farm seems to rely on credit data the least, displaying only a 45% premium fluctuation.

"The research found a strong correlation between credit scores and claims and people with better credit scores are less likely to get in an accident and file claim," said Odysseas Papadimitriou, CEO of WalletHub. "I was surprised by how much the companies rely on credit."

In its research, WalletHub obtained quotes from five of the largest auto insurance providers in the U.S. for two hypothetical consumers who have identical profiles except one person has excellent credit while the other has no credit. By isolating the role of credit data, it demonstrated the fluctuation in insurance premiums.

Also See: Man Achieves Perfect Credit Score, Issues Press Release

Credit data has the least impact on insurance premiums in Vermont which only had an 18% fluctuation while the District of Columbia had the largest amount of change with a 126% fluctuation. Since insurance is regulated at the state level and each one has different rules about how and if credit is used and how often and what percent premiums can be raised, prices can vary greatly.

In the average state, there is a 65% differential between the cost of car insurance premiums for a person with an excellent credit score and a person with no credit history, WalletHub found in its research.

Also See: Your Car Reveals Your Credit Score

Progressive is the most transparent carrier about both the use of credit data in quote generation and the source of that credit data, scoring the maximum 10 points in this category. In contrast, Liberty Mutual – the lowest scoring provider – obtained a score of only 4.5. For the full report and to see how credit data affects insurance premiums in your state, click here.

Many consumers are still unaware that their credit score is being used to determine premiums, he said. Insurance companies are not consistent in how they communicate this information.

Consumers should remain active in checking their credit scores more than once a year, because a "significant number of them have mistakes in them," said Papadimitriou. If you notice that one of two of your car insurance quotes are about 30% higher than the other quotes, it can be a red flag that there is an error in your credit history.

With the exception of policies written in California, Massachusetts and Hawaii, credit is a factor that affects car insurance rates, said Laura Adams, senior insurance analyst for insuranceQuotes.com.

An insuranceQuotes.com study found that drivers with poor credit pay 91% more (average across the U.S.) for car insurance than drivers with excellent credit. Even drivers with median credit pay 24% more than drivers with excellent credit. Click here for more info.

Most insurers use their own credit-based insurance score (CBIS) that is calculated using information in credit reports in combination with other factors, she said.

"Industry studies have shown that there is a link between a consumer's creditworthiness and like likelihood of making a future insurance claim," Adams said. "Those with excellent credit make fewer claims, so insurers reward customers good credit by charging them less.

Improving your credit score can be easily attained and lower the amount of car and home insurance and interest you pay for purchases, she said.

"Responsible habits like paying bills on time, not maxing out credit account and minimizing debt help raise consumers' credit and reduce the cost of insurance," Adams said.

--Written by Ellen Chang for MainStreet

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