It probably comes as no shock that your credit can have an impact on interest rates for loans. When it comes to your mortgage, auto loan or credit cards, the lower your credit score, the more you'll pay in interest. But did you know that your credit can also impact what you'll pay for car insurance?
According to some estimates, nine out of ten insurers use credit data in their evaluations of prospective and current clients. Here's how it works: an insurance risk score is based on the information in one or more of your three main credit reports. That information includes your payment history, age of your accounts, types of accounts, account inquiries and account balances. Insurers then purchase these insurance risk scores from third parties (FICO, the well-known credit scoring company, is one of them). However, age, income, gender, race, religion, marital status, and geographical data are not included in the calculation of insurance risk scores. Further, it's important to remember that an insurance risk score is different from any of the credit scores you may have seen when applying for a mortgage, for example. But it's based on some of the same information: the data in your credit report.
If you're interested in seeing what's in your credit report, along with two free credit scores, you can use Credit.com's free Credit Report Card. It provides a breakdown of the information in your credit report using letter grades, along with your free credit scores.
If you're worried that your credit could unfairly impact your insurance rates, there are some protections. As Credit.com's Director of Consumer Education Gerri Detweiler wrote in a recent article on insurance myths:
In addition to the fact that you can't be turned down for insurance solely because of poor credit, you may also be protected in another way. According to Lamont Boyd, FICO's director of global scoring solutions for the insurance market, the majority of states have implemented provisions of the NCOIL model law (NCOIL stands for National Conference of Insurance Legislators). Under those provisions, somebody who has gone through certain "extraordinary life circumstances" such as a catastrophic event (think hurricanes, tornadoes or flooding); divorce; death of a parent, spouse or child; temporary loss of employment (involuntarily) for three months or more; or identity theft, among others, "has the opportunity to go to their insurance company and offer that information so that the insurance company then can exclude their consideration of credit from their overall underwriting and pricing of that risk." He says, "That can benefit the consumer who has been negatively impacted by that extraordinary life circumstance."
Some take issue with the use of credit reports in the calculation of auto insurance rates, arguing that your credit has nothing to do with being a good driver.Nevertheless, credit data is used by companies offering auto insurance, so it pays to know where you stand and to be proactive when it comes to managing your credit.