Have you ever had the feeling that it is impossible to pay for a car insurance policy because some controversial number has caused your rate to go off the roof? Having a poor credit score is bad enough, but bad credit history is even worse, because it can significantly impact the price for auto-insurance. A recent studied took a closer look to how much annual premiums change based on a little-known number: credit-based insurance score. According to experts drivers with poor score end up paying double the insurance cost.
The Government Accountability Office reported, back in 2005, that 66% of interviewed people had no idea such a score existent, despite the fact that insurance companies were considering it in their practice. It’s not even difficult to calculate: a company will take into consideration 20-30 aspects related to financial history (including debts, length of credit history, late payments, bankruptcies etc.) and come up with an insurance policy. These calculations may vary from business to business (and they are usually guarded secrets) but have similar elements. The reasons for which they are still unknown is basically because companies don’t want their methodology known, so as not to be put at a competitive disadvantage. Unlike conventional credit reports, they will not make them public.
Determining Factors for Insurance Rates
Now is the moment when you begin to wonder what financial history has to do with car insurance rates in Las Vegas. In the end, isn’t vehicle coverage related to the likelihood of being involved in an accident? Apparently there is information to back-up this practice, and it has to do with a correlation between the number of claims filled and low credit score. People who have bad credit history are more likely to file a claim.
Another study, conducted by the Insurance Information Institute agrees with this view, and adds that the way people manage their financial affairs can help predict insurance claims. This is not great news for many drivers, and there were voices that spoke against it. One of them was Robert Hunter, former Texas Insurance Commissioner and current director of the Consumer Federation of America, who believes that this method of calculation is inherently unfair in determining insurance rates for drivers.
“It violates all the rules of the actuarial community (…) What is it about a poor credit score that makes someone bad at driving?”
Hunter also believes that the two classifications (poor financial history and likelihood to file claim) are a weak thesis of causation. Now, more then ever, should the economy support citizens, since there have been financial problems everywhere. If it were random people dealing with bad credit, we would have understood the “insecurity”, but during the recession, everybody had it tough. This didn’t mean that drivers didn’t improve, or that accidents stopped occurring so often. If you think about it for a while, you will actually realize that this is nothing but a marketing strategy to attract more influential drivers. So what exactly can you do?
If you’re from Hawaii, Massachusetts or California, you needn’t worry, because you will not become the slave of your financial history. If you are part of the other 47 states, you will have to clean up the credit score by paying all obligations on time, not opening a new credit unless absolutely necessary, and keeping credit card balances low. By doing so you will ultimately be able to switch to usage-based insurance, and have your risk for a claim monitored with a GPS device. Drivers who have switched to this system have reported a drop in their insurance premiums between 5-35%.