Statistics Say: Bad Credit, Bad Driver

A new study reported by CBS News has revealed something that most agents have known for quite some time: if you have bad credit, then you’re probably a bad driver — at least, that’s the case as your premiums are concerned.

Before proceeding, it’s important to first draw a distinction regarding what is meant by “bad credit.” Your credit-based insurance score does look at your credit history — but you shouldn’t confuse it with your credit score. Your credit-based insurance score is calculated using information in your credit report but many insurance companies have their own proprietary methods for using your credit information and evaluating it.

Fair or not, the survey showed that insurance customers with poor credit-based insurance ratings paid 91 percent more in premium costs than their good-credit counterparts. When you remove Hawaii, California, and Massachusetts, from the mix — the only three states that prohibit insurers from charging based partly on credit rating — the premium inflates to 116 percent more than drivers with sterling scores.

Reasons For The Price Difference 

There are a number of reasons that CBS News cites as possibilities for why bad credit scores translate to high premiums.

“Perhaps people who have bad credit are so worried about money that they drive erratically — or maybe they’re unable to handle the smaller claims that another driver might pay out of pocket,” explains MoneyWatch. “Or, there’s a chance that if you’re meticulous about your credit, you’re also meticulous about your car, making certain to keep it secured in a locked garage, where it’s less vulnerable to break-ins.”

Regardless of the possible factors, insurers know one thing for certain: lower credit-based insurance scores in at least 47 states lead to higher claims incidents, and that means higher prices. (Unfortunately, since the three aforementioned states do not use credit scores as a factor, there’s no way of telling whether this general finding holds true in those jurisdictions.)

Can I Still Fare Better If My Other Premium Factors Are Favorable? 

To answer this, we must first define what the other factors that go into a quote are. There can be a number of factors — dozens, actually — that go into determining your rates. Some of these include geography, car make and model, past driving record, age, and gender. But even when none of these factors are out of the ordinary, you still pay more.

Even if your credit-based insurance score is just average, expect to pay up to 24 percent more than someone with a favorable rating!

So to answer the question above bluntly, no, you can’t. That’s why, if you find yourself in this position, the best thing you can do is start repairing your score right away. It’s not as hard to do as you think.

In fact, persons who declare bankruptcy can have a credit score in the 700s within two to three years after the discharge of their debt.

If you can avoid bankruptcy and start making your payments on time, erasing debt, and managing your credit lines responsibly, you might be able to do it even sooner. If you’re unsure where to start, credit counselors are always good sources. They can teach you techniques that ensure your monthly payments are having the biggest impact.

Here’s the full report from CBS News. It’s an eye-opener no matter where you are on the insurance spectrum.

 

Do you think credit history should be a factor in determining your overall rates on the road?

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