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Does Irresponsible Spending Impact Car Insurance Rates?

Irresponsible spending can negatively affect a person’s credit score and impact the ability to obtain financing, find a place to live or even land a job in the future. One consequence of credit problems that many people are not aware of is the fact that a bad credit score can mean paying significantly more for car insurance.

Why do car insurance companies charge people with a poor credit history more than those with good credit? The New York Times explains that insurance companies utilize the information contained in credit reports and reflected in credit scores to charge higher rates to those with poor credit history because these individuals are viewed as a higher risk. Insurers providing car insurance have noted that people with bad credit tend to file significantly more claims than those with good credit. According to Kiplinger, individuals with a poor credit history may be twice as likely to file an insurance claim as compared to those with good or excellent credit.

Car insurance companies typically use a customer’s FICO score to determine whether a person is insurable and whether a higher premium should be charged. A FICO score is the most commonly used credit score that is calculated based on information found in an individual’s credit report. This three digit number ranges from 300 to 850, and car insurers tend to charge higher premiums to customers with a score lower than 650.

Opponents of the use of credit scores during the process of determining car insurance premiums argue that minorities and people with low incomes tend to be discriminated against when credit information is used. However, car insurance companies that utilize credit information have pointed out that financial data contained in reports cannot indicate whether a person belongs to a minority group and does not contain information about their salary and therefore cannot be considered discriminatory.

Do people with a poor credit score always pay more for car insurance? Not necessarily. While most car insurance companies do take credit history into consideration, polls show that approximately one out of 10 car insurance companies does not use credit reports or scores to determine premiums. 

People who already have car insurance coverage may not be affected by credit checks conducted by car insurance companies. Research indicates that credit history is typically only used by car insurers for new customers, and existing customers who are renewing their policy rarely see a raise in premiums due to negative credit information.

Some states allow individuals who receive a higher premium quote due to personal credit information to request a lower premium due to extraordinary circumstances that have had a negative impact on their credit score. Examples of situations that may fall under this category include medical emergencies that have resulted in overwhelming medical bills, job loss coupled with an extended period of unemployment and identity theft. Anyone wishing to claim an exemption due to extraordinary circumstances should research their state laws to determine whether this is an option.

Individuals can obtain a copy of their credit report prior to purchasing a car insurance policy to review the information contained within the report and ensure that it is correct. A free report is available once per year through each of the credit reporting agencies: Experian, Equifax and TransUnion. Even individuals with a poor credit score can find a cheap car insurance policy that fits their budget.