Let’s start by defining an “Insurance Premium” Everyone knows that an insurance premium is the amount of money that you pay to your insurance company, in exchange to be insured with a certain amount of coverage. You basically give your money to an insurance company, who in turn, promises to cover your losses in certain situations up the agreed amount of coverage.
Many factors go into calculating your insurance premium. The most well-known of these factors for auto insurance are age, driving record, years licensed, car make and model, miles driven per year, primary use of vehicle (work or personal use), and most important is credit history. Contrary to what many people believe, insurance companies do not consider vehicle color major factor in determining auto insurance premiums.
Why is my credit rating used to determine my insurance premium? When people think of credit ratings, they think of personal credit reports and FICO scores, which is not completely accurate. An individual’s credit rating is relative to how it is being used. This means that you will almost always have a different credit rating when applying for a car loan versus a home loan.
Why is this? Because a credit report requested for a person applying for a car loan places heavy weight on your car payment history or lack of history. If you had a recent repossession, you are going to find it tough to find a company that will help you finance a car again. On the flip side, if you applied for a mortgage with the same credit report that showed a recent repossession of your car, you will probably have much higher FICO scores than you did when applying for a car loan.
Overall, credit history is used for all industries to help determine risk. Disagree with me if you wish, but I believe that a credit report is a direct reflection of a person’s responsibility and credibility. Applying this theory to insurance premiums, if you show low responsibility and credibility, you will receive higher premiums due to the higher risk of getting into accidents or committing insurance fraud.
If credit history is such an exact science, why do some insurance companies advertise that they do not use credit scores? Believe me, these companies that provide such loose coverage come at a much higher premium than companies that do a credit check. The insurance companies with no credit check required, simply assume that you have the worse possible credit upfront and factor this into your insurance premium accordingly. It’s simply a marketing gimic that targets people that have been turned down for insurance coverage in the past, or have been dropped by their insurance carrier for driving or credit history.
The best way to find the lowest insurance premiums is to shop around different insurance companies. Each insurance company specializes in certain risks. If you choose an insurance carrier that primary gives low rates to young females and you are an older male, you will get a higher rate than if you went to an insurance carrier that primarily insures older males.