August 20, 2014 by Lisa Brammer
Auto insurance premiums are not static, like premiums of other insurance products, they vary from person to person. There are many factors actuaries take into account when calculating premiums—they want to determine the odds an insured person will file a claim. People deemed low risk, are given low premiums, people thought to be high risk pay much more for their insurance.
Obviously, driving history is one of the important risk factors taken into account. If you’ve had an accident or tickets due to speeding or other driving infractions you can expect to pay higher premiums—at least for a while. Age and gender also play a part—if you’ve ever had to insure a teen-age son you already know what I’m talking about. There are other elements factored into the premium cost: marital status; age, make and model of the vehicle, and distance driven daily are just a few. One of the newer risk factors added to the calculation is credit score. And it’s not just a bad credit score that will adversely impact rates—lack of credit history will too.
Meet Donald Tonack. He and wife are residents of Lebanon, Oregon and neither of them have ever had a car accident. But despite his stellar driving record and the fact that he has never filed a claim, his insurer increased his premium by 11 percent a few years ago.
I read about Mr. and Mrs. Tonack in the Wall Street Journal last weekend. According to the August 16th article, they’ve always paid for just about everything in cash. The 76-year-old retired pastor was quoted as saying, “I’ve never made a late payment in my life.” Ironically, Donald was also, at one time, an insurance underwriter. “We were probably the best risk they had on the books,” he went on to say. His insurance company told him his rate increased because he had no credit history.
WalletHub.com, the self-proclaimed social media website for your wallet, recently conducted a study evaluating the importance of credit data to insurance underwriting. They created two imaginary consumers who were exactly the same except one had excellent credit and the other had no credit at all. They used these two made-up consumers to obtain quotes from five of the largest auto insurance providers in the country. By doing so, they isolated the role of credit scores in insurance pricing. It’s important to note that the study was based on a specific scenario. With all the varying elements used when determining premiums, actual experience (and numbers) may differ from the results seen in the study. But the take away of this study is clear. Credit scores can significantly impact insurance premiums.
The key findings in the WalletHub report revealed: average premium fluctuation by company, how transparent insurance providers were in disclosing use of consumer credit information in pricing policies, and states where credit data is most and least significant.
The insurance company that relied the most on credit score data had a variation of 116 percent between premiums for the made-up consumer with excellent credit and the one with no credit. Do you know what that means? Let’s say the person with excellent credit had premiums that were $1000.00 per year. With a variation of 116 percent, the person with no credit would have premiums of $2160.00 per year! I bet that poor imaginary consumer wished he had some (good) credit now. The company that relied on credit score data the least had a 45 percent variation.
In the average state, there was a 65 percent differential in the cost of car insurance premiums. Credit data had the lowest impact in Vermont, with a variation of 18 percent, and highest in Washington, D.C. at 126 percent. Wisconsin, where I live, saw a differential of 80 percent. California, Hawaii, and Massachusetts saw no differential because these states ban the use of credit histories when calculating car insurance premiums.
Check out the 2014 WalletHub.com study here.
A lot of people do not understand the connection between credit scores and car insurance, they think one should not have anything to do with the other. But, for the insurance companies, a lot of research has gone into understanding the correlation—consumers with lower credit scores file more insurance claims.
Credit scores play an extremely important role in your overall financial health. It’s important to understand your score and what you can do to improve it. And while you’re at it, you might want to shop your auto insurance—especially if you have either really great or poor credit. You might be surprised by what you find.
Founded in 1950, United Credit Service, Inc. is a full service, licensed revenue cycle management and debt collection agency in Wisconsin providing highly effective, customized one on one management and recovery solutions for our business partners. We offer pre-service collection solutions as well as traditional back-end collections. Visit our website at http://www.unitedcreditservice.com or call 877-723-2902.