I want to share with you a brief conversation I had with an insurance agent named Sandy*. She is an agent for State Farm in Georgia and worked in the industry for over 15 years. I was amazed when she explained how someone’s credit score affect his car insurance rate. Now, I knew that your credit played a role in how much you would pay for car insurance. But what I didn’t know was how much of a role it plays. I will share with you the exact details she shared with me along with some other things I’ve discovered after doing further research on this very subject.
Fact #1: Someone With Poor Credit Is a Greater Risk than a Poor Driver With Excellent Credit
This was the first shocker. Someone with good driving history but poor credit has a greater chance of being denied than a person with a terrible driving history but with excellent credit. I told Sandy, “I don’t believe it. It’s an insurance company, so wouldn’t they want to have someone with great driving history?” She explained that, yes, the insurance industry wants to cover great drivers. However, “in the grand scheme of things,” she said, “a person with poor credit is five times more likely to file a bogus claim.”
Honestly, I was dumbfounded when I heard those words, so I did some research to confirm this information. According to Fair Issac, aka FICO, 30 percent of your insurance score is based on your credit utilization. This insurance scoring scale could come from FICO, or it could be an in-house scoring scale used by the insurance company, such as All-State or State Farm. It is used to see how responsible you are in using your credit. Why does this matter? Because in the company’s point of view, if you’re reckless with credit, what would prevent you from filing a claim for every accident, regardless of the severity? So, thanks to raw data and in-house calculations, they can “back up” such statement made in the previous paragraph.
Fact #2: Missing a Premium Payment Will Hurt Your Score
Sandy shared more with me about how they score new customers. She shared this fact with me after I made the comment that a person can go to another company. “You have a right to go to another company, but once they look at your payment history, they could either deny you or charge you an expensive rate.” Again, she stressed to me that a person with poor payment history would have a tough time keeping their coverage, despite never having an accident. Interestingly from the same reference article, FICO states that 40 percent your insurance score comes from your payment history. 40 percent! The insurance company’s logic is that if a person is having trouble paying the necessities, including paying their utilities and other debts, they would more likely file a claim.
Already, you can see why your rate can increase (or decrease) all of a sudden with or without notice. So, despite your fussing with the insurance rep, explaining that you never had an accident, your insurance credit scored dropping below their standards may be the reason for the increase. The rep may not willingly tell you that was the reason for your rate increase. But while you are on the phone, keep in mind that a total of 70 percent of your insurance credit score is from your payment history and credit utilization.
Fact #3: Changing companies For a Better Rate Will Hurt You In the Long Run
“I always tell my customer never to leave for a better rate. They are better off staying,” said Sandy. Of course, I asked her why. She stated that the longer you are with an insurance company, the more stable and reliable you seem to the company. They also reward you by providing you a discount, only raising your premium a small percentage if rates in the area go up. For example, in the Atlanta area, premiums this summer will increase by 22 percent due to distracting driving, and most likely go up again thanks to I-85 bridge collapsing. But for a person with excellent credit and long history, their rate may only go up 5-10 percent. FICO confirms this fact as well, for 25 percent of your insurance score is based on your credit length (including your years with an insurance company) and how recently you applied for new credit. In fact, this could be the reason why your new insurance company, after six months or a year later, your rates skyrockets. She did offer a suggestion if you are itching to leave because of the premium increase. “It’s better for the person to call us to modify their coverage. Many people have too much insurance or have features that don’t benefit them. This will not affect their score.”
Insurance Secrets Worth Sharing
There were some other things Sandy shared with me that was noteworthy. She said if you have an older car, never use the roadside assistance provided in your plan. In the past, this was a feature to lure new customers. Now, they are recording this as an insurance claim, as if you had an accident. The reason? It’s more costly than anticipated. Also, if you had a hit-and-run accident, call the police to obtain an accident report. If you leave the scene and then call your insurance company, they will file your claim under your collision coverage instead of uninsured motorist coverage. Filing it under collision will still get the car fixed, but it will count against your driving record.
My Final Thoughts
We are living in a world where credit is gaining more authority than ever before. It no longer matters how long you’ve been with a company or how faithful you’ve been to them. In every business sector, but especially the insurance industry, your credit will be the ultimate decision maker for them to provide you blessings or maledictions. What can you do about it? First of all, do not fret about your insurance credit score to the point of calling your insurance company for it. Because most of these scores are in-house, your score can regularly change. Besides, they will say that it’s proprietary. What you can do is consider how you buy your car insurance, pay on time, and stay with them as long as possible, at least 3-5 years. If you live by these secrets and do good with your other expenses, and you will experience lower car insurance premiums. Share with me what you think about this in the comment section below.
*Note-Name has changed to protect identity of the agent