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I worked for the two largest insurance companies in the country (State Farm and Allstate) for nine years, and I can say first-hand that the use of credit in determining rates is a controversial one. That having been said, I can tell you:

A.) The use of credit in determining insurance rates makes perfect sense.

B. There's absolutely no question insurance companies should notify customers that their rates are affected by their credit. It's a matter of being open and honest with your customers. Also, insurance rates are extraordinarily complex, and it's important customers at least know and understand the factors that contribute to their rates.

But I would take this open policy further than most insurers. They should go to great lengths to explain why and how credit is used. For instance:

- Insurance companies honestly don't know why credit is a good predictor of a person's insurance risk. For some reason, they're afraid to admit this, but all they know is that credit IS a good predictor of your future insurance risk. Statistics don't lie, and statistics prove that the worse your credit, the greater the chance you'll file a claim just as someone who has filed a claim in the last year is far more likely to file another claim in the next three years. Why? Insurance companies don't know. They just know it's true. That's one of the reasons your rates increase when you file a claim.

- Credit is only one of the factors insurance companies consider when setting your rates. In the case of a major insurer like State Farm, there are many, many other factors that also contribute to your rate: your age, address, driving record, type of automobile, daily commute, etc.

- Although there's nothing you can do to immediately reduce your rates, there are things you can do in a relatively short period of time. Your credit score, for instance, can change almost daily and you can improve it within a matter of months.

The most important thing I can tell you about insurance is that it is critical you truly understand your coverage. Don't just buy auto insurance because it's the law. Get it to protect yourself in the case of an accident, and know how your insurance company will respond when you do have an accident.

Learn more about this author, Allen Edwards.
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