Yes, You Can Save Hundreds on Car Insurance
Learn How Credit Affects Insurance Costs
March 24, 2014 by Mark Dye
By now we’ve all heard about credit scores and how important they are to our financial future. But you might not have heard of something called a “credit-based insurance score” (CBIS). And knowing what it is, and how it works, might help you save money in the long run.
What it is
A CBIS is quite similar to your “standard” credit score, in that it’s derived from the information found on your credit reports from the three main bureaus: Equifax, TransUnion, and Experian. Each bureau uses a different algorithm to determine your score, and each may even contain different information (a more up-to-date record of payments, a missing past address, etc.). So like a standard credit score, your CBIS will likely not be the same from bureau to bureau.
Where a CBIS parts ways with a traditional score is in how it weighs different parts of your credit history. Whereas a lender will look at things like job history and income level, an insurer is simply looking to see if you’ve met your responsibilities.
Why they do it
Why do insurance companies look at your credit report to determine your premiums? Because studies have shown that those who don’t honor their financial obligations also tend to file more insurance claims. A Federal Trade Commission study noted that
[CBIS] effectively predict the number of claims consumers file and the total cost of those claims. Their use is likely to make the price of insurance better match the risk of loss that consumers pose. Thus, on average, as a result of the use of scores, higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums.
In other words: the worse you financial situation, the more your insurance might cost.
What to do
If you haven’t already, get a free copy of your credit report from all three bureaus at www.AnnualCreditReport.com. From there, read through it and make sure everything is accurate. If there are incorrect items, dispute them with the appropriate credit bureau. And if you need information about repairing your credit, we have a section just for you.
Remember: by taking care of your finances, you really can save a few hundred dollars on car insurance!