Your driving record is pretty good. You’ve never filed an accident claim. You’re over 25 and gainfully employed. So how come your car insurance quotes look like the national debt? It could be your credit score. While it’s just one of many factors, increasingly your credit worthiness is used by insurance companies to determine your car insurance premiums.
Before you holler “no fair,” think about it from the insurance company’s point of view. Your credit score indicates your history of paying your bills on time – essentially, of meeting your contractual agreements. If you’ve recently filed bankruptcy, had your wages garnisheed or routinely missed payments, the insurance companies see you as statistically likely to make late payments on your car insurance policy, have checks bounce because of insufficient funds or cancel your policy early. They also have evidence that people with bad credit are more likely to get into accidents and file claims. In other words, they see you as a poor risk, and insurance companies are in the business of assessing risk and charging accordingly.
The bad news is that your insurance company may or may not tell you that your credit rating is the reason you don’t qualify for cheap car insurance. According to the Fair Credit Reporting Act (FCRA), you have the legal right to be notified if you’re declined credit, a job or insurance because of your credit history. Unfortunately, at the moment, FCRA is a little murky about whether your car insurance company has to tell you that your higher car insurance premium is the result of your crummy credit. Until the court systems of the various states work this out, assume the worse.
What can you do about it? Shop around for car insurance quotes online. Different companies have different ways of assigning your insurance risk score. In general, the Fair Isaac Corporation (aka FICO, the analytics firm assigns the credit scores financial institutions rely on) considers five categories in its insurance risk-scoring model. These include your past payment history; amount of credit you owe; the length of time you’ve had credit established; the number and proportion of newly opened credit; and the types of credit you have established.
Find out what your current credit score is (not just your credit history). Then start doing what you can to clean up your credit rating. There is no quick, easy fix for doing this, but the time and effort can save you thousands of dollars over the years.