by Katerina Nikolas

Created on: January 21, 2010   Last Updated: March 16, 2010

Is there really a connection between paying a bill late and paying more for your auto insurance? Actually there is. It may be controversial to some, but insurance companies in most states now use a persons credit report to evaluate the terms and premiums of auto insurance coverage. A credit report is only part of the evaluation, but it does influence it.  Some will pay higher premiums due to this practice but others will benefit by not subsidizing other drivers who are considered more of a risk.

When a person needs insurance for their vehicle an insurance company will use an underwriting system to assess if someone is a good risk or a safe bet. The main considerations will be past driving history, the age of the driver, previous claims made, the type of vehicle and mileage, and of course the area. Insurance companies have now also turned to credit reports as another consideration to be factored in.

Statistics, which are the middle name of most actuaries who determine insurance risks, show that there is a correlation between a person with a higher credit score actually making less claims on insurance policies. Although there is no proof of this the statistics uphold the fact and thus it is now one of the determining factors used by most, but not all, insurance companies.

When a credit report is brought into the underwriting analysis it encompasses several points. It shows the credit history of a person, and the length of that history. If a person has consistently used credit well, paid on time and not been maxed out to the limits with credit, they will have a high credit score. In many instances now your credit score is taken into consideration before your driving history.

Insurance companies study this information as part of risk assessment. The analysis concludes that those with a higher credit score consistently make less insurance claims than those with lower credit scores. The stability factor is influenced too as those who appear to be less of a risk are statistically more likely to maintain their vehicle to a higher roadworthy standard, and be safer drivers. A good credit score basically shows a more responsible person in terms of underwriting analysis. If you handle your finances well you will probably make less insurance claims, and thus be less of a drain on the insurance company.

The type of auto insurance offered and the level of premiums are thus influenced by a persons credit score. One should always check with different companies for better deals and lower premiums, and if you know you have a bad credit score then you have the right to ask if the insurance company uses your credit score, as not all do. The reality is if that you have a low credit score you could actually end up paying between 20 and 50 % more on your premiums.

At the end of the day the use of credit scores as an analytical tool for insurance premiums can work either way, but it does reinforce the need to build up and maintain a good credit score. If you are considered at the high risk end for insurance, remember that it is your overall handling of credit which is one of  the influencing factors, so by taking control of your finances in a positive manner you could end up saving money long term with lower premiums.

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