Non-Driving Factors Set Insurance Rates

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Ask most people how car insurance rates should be figured and they’ll point to the driver’s history. Careless drivers should pay more, the thinking goes, and careful ones should pay less.

But the insurance industry sees it a little differently. Certainly, a string of accidents will push your rate up. But insurers want to identify the costlier customers ahead of time, so they look at factors like the customer’s age and address. Young drivers are riskier, and people who live in congested or crime-prone areas are more likely to file claims than people who don’t.

One of the biggest issues insurers address is the likelihood they will have to pay out claims, and they’ve spent fortunes unearthing factors that identify that risk. To the irritation of many consumer advocates, some of these factors seem to have nothing to do with whether one is a good driver or not.

Such factors include the customer’s credit score, education, income and occupation. While insurers consider the details to be business secrets, it’s pretty clear all four of these factors can bear on a customer’s financial security. People in a weaker financial position are not necessarily poorer drivers, but they are more likely to file claims than the well-to-do.

As an example, a prosperous driver is more likely to fix a dented fender out of his own pocket, especially as it’s well known that filing a claim can lead to a rate hike. People with less money, however, may not have this option.

According to The Wall Street Journal, a Florida study found that education and occupation could cause rates to vary by as much as 30%, while a New Jersey study found that lower-income drivers were less likely to get the cheapest rates than people with professional-level incomes.

Consumer advocates feel this is an unfair form or profiling, that drivers should not be penalized for using the insurance coverage they have paid for, and consumer groups are pushing regulators to curb use of credit scores and other non-driving factors in setting rates. The Consumer Federation of America plans to focus on the issue at a Washington event in December.

But for now the system is what it is, so how can you use it to minimize your car insurance costs?

It probably makes sense to refrain from filing a claim over a door ding or fender bender, instead keeping a fund to pay for repairs up to $1,000, or even double that.

If you’re not going to file small claims, you can reduce your premium by having a higher deductible.

It will also pay to do all you can to improve your credit. Pay bills on time, reduce the number of credit card accounts, trim your credit limits and reduce the size of your outstanding balances relative to your limits. All those moves make you look less risky. Having many credit cards, for instance, makes it look like you could quickly take on excessive debt.

There may not be much you can do to boost your income or education level, but it will pay to make sure you’ve reported them correctly in your insurance application, and that your tell the insurer if these factors change. If there’s a teenage driver in your family, remember that some insurers reduce rates for good students.

Of course, insurance is cheaper on cheaper vehicles. Once a car or truck is 10 or 15 years old, it may be worth so little there’s no reason to cover it for damage or theft, though healthy liability coverage is always a must.

Obviously, shopping around can pay, too, as some insurers really are cheaper than others. While many drivers stick with one insurer for years out of inertia, it makes sense to compare rates at least once a year.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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