“Want to save money and protect your vehicle? You can do both with a car insurance policy from GEICO,” a mass mailing promises.
But how do car insurance companies really calculate your premium? While there are certainly lots of factors that are used, including driving history and number of claims, I was surprised to learn your credit score counts, too.
That’s right. We all know your credit score is important when buying a house, a car, or opening a credit card. That all makes sense. “A credit score is a number that is used to predict how likely you are to pay back a loan,” the Consumer Financial Protection bureau says.
So why the heck does my credit score matter when calculating my car insurance?
“I have good credit, so I’m a good driver?”
“I’ve crashed my credit, now I’m going to crash my car?”
Car insurance companies say, “Yes.”
“While the reasons why are less than crystal clear, research shows that credit scores can accurately predict accident potential. Statistical analysis shows that those with higher credit scores tend to get into fewer accidents and cost insurance companies less than their lower-scoring counterparts,” online car insurance company Esurance says.
Progressive also openly acknowledges it uses your credit score to come up with your rate, “We use credit because numerous studies have shown that credit is a very powerful and independent predictor of the likelihood of future accidents or insurance claims.”
It’s interesting to note Massachusetts, Hawaii, and California don’t allow car insurance companies to use credit scores to calculate insurance rates. But outside of those states, personal finance website WalletHub found rates can vary dramatically based just on credit score.
WalletHub says it got quotes from five of the biggest insurance providers for consumers who are identical, except one has excellent credit and the other has no credit.
The experiment found car insurance premiums in Maine can fluctuate about 109% based on credit score.
The report says, “Credit data has the least impact on insurance premiums in Vermont (18% fluctuation) and the greatest impact in the District of Columbia (126% fluctuation).”
Under the Fair Credit Reporting Act, you do have the right to get your credit report for free. Click here.