Things can really become disappointing when you have to depend on your credit score for every upcoming financial decision. If you understood that applying for an auto loan might require a good score, the same level of patience may not get extended to insurance rates as well. However, unless you are a resident of Hawaii, California, or Massachusetts, your FICO credit score and history will matter in determining your auto insurance rates. In short, with a bad credit score, you are likely to pay higher premiums for the same coverage as compared to a good credit score holder.
Why do auto insurance companies consider credit scores and histories?
Before elaborating on the reasons, it is necessary to understand how auto insurance companies generally work. A typical firm will look into your driving history, experience, car’s model, demography, age, and more such parameters to determine your insurance score. This score will determine the risk the company is taking in insuring you, the driver, and consequently, the premiums that you will have to pay to the insurer. The payments you make are the insurance company’s revenue. If you do not make any claim, they make a profit. However, if their initial analysis suggests that you are more likely to make a claim on your insurance, they will naturally try to charge you higher premiums to keep their business open and shop running.
Now, coming to where do credit scores come in. Say you have a good credit score. It means that you are capable of managing your existing debts and you can continue to pay your premiums as well. The insurer is likely to have an assured revenue flow and there is no need to charge you high. But if your credit score is on the bad side, the auto insurance company assumes that you might be unable to pay your premiums at some point in time and the insurer is likely to make a loss by insuring you. Hence, the rates become steep for bad credit score holders in auto insurance rates as well. Unfortunately, almost 92% of US auto insurers follow the credit history-based insurance scoring policy.
However, credit is score is just one of the many factors
Credit scores really do not matter much in auto insurances. The companies simply use the scores as yet another layer of safety mechanism to guarantee their investments. You can reduce the dependency on your credit score while getting auto insurance by buying your vehicle from one of the top used car dealerships where quality plays a massive role to bring down your insurance rates. Plus, if you have a decent driving history combined with moderate experience, your credit score or history will hardly matter to the insurer. Keep in mind that the insurance company’s true intentions are to reduce their risks. And if all other factors other than your credit score or history are fine, they will have no reason to charge you a high premium.
Or, shop around for your insurance
Not all auto insurance providers will lay emphasis on your credit history. And if your other parameters are not that shiny as well, you will need to shop around to find the right insurer who will not look at your credit score. In the top buy here pay here car lots where credit scores and histories do not matter for financing your car, you are likely to get contacts of insurance companies as well who follow a similar rule. Or you can visit multiple insurers and compare their rates to settle on the premium you can swing.
In reality, every auto insurer has its own model to calculate your insurance score. And it is the company who decides how much importance to give to your credit history. Just because a firm is asking for your credit score does not mean that they will charge you high premiums. Similarly, an insurer who showed no interest in your credit score may ask for a rate that is steeper than the general market. The best advice you can follow is to stick to good used car dealers, buy a top-notch car, and let that majorly determine your insurance rate. The insurance is ultimately on your car and your capabilities as a driver. Do your research and select your insurer wisely.