An auto insurance company will study your credit scores, and based their findings determine your premium amount. Of course there are a volley of other factors which are also considered but let’s understand why credit rating is given so much importance.
Statistics have proven to auto insurance companies and other financial organizations for years now that a customer is capable of making monthly payments on time. Many people today opt for monthly payments on their insurance premium, more so people with bad credit as they are mostly pressed for cash.
A customer who can not make timely monthly payments and who regularly defaults translates into additional expenses for the insurance company as they need to hire a recovery agent or pay an in house recovery agent a salary in order to recover a payment that is rightfully theirs. It also leads to a great deal of mismanagement of funds as if a few hundred customers don’t pay their premiums on time the companies financial planning gets affected as the lack of liquid money available to them is lower.
A person who maintains his or her credit scores tends to be a mature and responsible individual who is capable of shouldering responsibility. Such an individual is less likely to display rash or reckless driving and also less likely to be involved in a vehicular crash.
For these reasons auto insurance companies tend to refuse insurance policies to customers with very bad credit scores.
Is it legal for an insurance company to go through your credit score?
Yes, it’s completely legal; in fact this is exactly what a credit score was created for. The Federal Fair Credit Reporting Act has provided auto insurance companies, other financial companies and any other company who provides a service where there is an exchange of money the provision to check up on their potential customers and thus analyze if it is indeed a profitable affair doing business with that customer.
This step is taken in the benefit of the business as per a government directive and aims at protecting businesses and business owners from certain losses which can be caused by providing a service to a customer who will in all likeliness not be able to pay them back.
The calculation of the effect of your credit score on your auto insurance premium is based on the following criteria.
Public records: Public records can provide auto insurance companies with information about how many times you have filed for bankruptcy, how many times you have undergone collection proceedings, foreclosures you might have opted for on your loans, and any liens or current loans you may have.
Past payment history: Past payment history can provide auto insurance companies with information on the number and frequency of late and missed payments and the number of days between the last date of payment and the date you actually made the payment on.
Length of credit history: The length of your credit history is basically the amount of time you have active in the said credit system; the longer the duration you have been in the system the better, unless of course you have bad credit.
Inquiries for credit: Inquires for credit can provide the auto insurance companies with information on the number of applications you have recently made for credit. Credit can include mortgages, credit card accounts, store credit cards, and utility loans.