You probably knew a bad credit score could impact your chances of securing a reasonable interest rate when buying a house or car, but did you know a low credit score could also impact how much you pay in car insurance? That’s the finding of a new study by InsuranceQuotes.com, as reported by al.com. Although your credit score is only one of several factors used in the calculation of your auto insurance premiums, it can have a large impact on how much you pay. In fact, your credit can have a larger impact on auto insurance premiums than any other factor, according to Consumer Reports.
In Alabama, drivers with poor credit pay an especially high penalty. Drivers with poor credit can expect to pay 190% more than drivers with good credit. That rate ranks Alabama sixth in the nation for the largest penalty for poor credit. Alabamians with fair credit can expect to pay 56% more drivers with good credit, the highest percent increase in the country. For comparison, Arizona, Nevada, and Michigan also had high penalties for average or poor credit. In contrast, California, Hawaii, and Massachusetts, forbids insurance companies from factoring credit into auto insurance premiums. In those states, car insurance quotes focus on driving record as opposed to future risk.
The main reason insurance companies cite for factoring credit into quotes is that drivers with good credit are less likely to file insurance claims in the future. Insurance companies typically use a Credit Based Insurance Score (CBIS) as a major factor in determining your auto insurance quote. This practice started in the mid-1990s and is the policy of virtually all insurance companies. The CBIS score ranges from 100 to 999 and uses about 30 of the 130 elements of the more familiar FICO credit score. The CBIS is only used by insurance companies. The better your CBIS, the less you will pay in auto insurance. To increase your CBIS score (and thus lower your auto insurance costs): pay bills on time, avoid opening new lines of credit, and keep credit balances low. These are the same tips in improving your FICO credit score. You also may be able to request an “extraordinary life circumstances exception” in certain instances.
Credit-based auto insurance premiums has its critics, however. Many argue factoring credit into auto insurance decisions traps people in a cycle of poverty or financial disparity. Catastrophic life events, like medical bills, job loss, or divorce, don’t necessarily reflect a driver’s safety. Consumer Reports even has a petition to ban credit history in auto insurance premiums, available here.
Alternatively, make sure you are taking advantage of all insurance discounts for which you qualify. One of the best discounts is bundling multiple policies: when your car insurance is combined with home and/or life insurance, savings can be substantial. Most insurance providers also offer a discount for multiple vehicles, installation of anti-theft devices, completion of defensive driver courses, being accident-free for a period of time, and for student drivers who earn good grades in school. Some insurance providers also offer discounts for member of the military or other occupations, driving an environmentally friendly vehicle, having daytime running lights, anti-lock brakes, loyalty to the insurance provider, and even being a homeowner. For more information on car insurance discounts, BankRate.com has compiled a great comparison chart. For more information on how insurance affects your claim, visit our page here.
You probably make every effort to be as safe on the road as possible, but some accidents are simply unavoidable, or due to the carelessness or negligence of another driver. Even though we like to think an accident will never occur to us or our loved ones, it’s important to be prepared for the unexpected. For more information on car accidents and dealing with various insurance companies, visit our Car Accident Guide. Our “next steps” guide, and “Step-by-Step Car Accident Guide,” may also help navigate the difficult post-accident process. Of course, if you have been injured in an auto accident in Alabama, contact us today for a free evaluation of your case.