How Can Credit Rating Affect One's Insurance Rates

By Author: Marcus Stalder
Total Articles: 491
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Credits of all kinds are an integral part of our lives and it's quite hard to find a person in the Western society who doesn't have an open credit line or never used credits in general. Credit cards, banking accounts, loans and other financial instruments have replaced hard cash for millions of people. The way a person utilizes their credits has become one of the factors the person is evaluated by different institutions. Credit rating is one of the factors that can influence loan rates and the possibility of getting other credits as well. And it turns out that a person's credit rating affects insurance rates as well. How can this happen and is it legitimate?

Let's first look into the concept of credit rating. A person's credit rating is based on credit record, which comprises data concerning all types of credits used and their status. For example, if you use several credit cards and used a special credit to finance the purchase of a TV set a couple of years ago, this financial information will certainly be reflected in your credit record. The more negative entries you have such as due payments, open unused credit lines ...
... or bankruptcy, the lower your credit rating will be. And respectively, having a clean record results in a better credit score. So what this has to do with car insurance?

As you may know, car insurance providers use a whole set of factors to determine the rates they'll charge each customer. It's not that drivers get the same rates for any policy they buy. Insurance companies use these factors to determine the risk of insuring every particular driver. And among different factors credit rating is regarded as one of the most reliable for predicting the likelihood of the driver filing a claim. How is this possible? Quite simple - insurance specialists have statistically observed that drivers with poor credit scores tend to file claims far more often if compared to drivers with good scores. This observation has lead many companies to adopt credit rating as one of the main factors when calculating car insurance rates. And you certainly can't blame insurance providers for trying to minimize their risks this way.

Some of you may state that it's against the law to use such confidential data and it's an infringement for the insurers to use credit scores without noting the customer. However, federal laws allow banking, lending and insurance institutions to use these data without disclosing them to third parties with the purpose of increasing operation efficiency. So there are no violations from the legal point of view as well.

What can you do if your credit score isn't as good as it could be? The good news is that not all insurance companies utilize credit score in their calculations, so the best solution is finding a company that doesn't and getting insurance from them. You can also try to outweigh your low credit score by using discounts (if you're eligible for any) or shopping around to get the lowest rate possible. If you spend some time you'll certainly find a policy that will offer good rates and conditions even if your credit rating isn't that good.