It may seem silly that making late payments on your favorite department store credit card could affect how much you pay for auto insurance -- but it might. Insurance companies use your credit history to calculate an insurance score, which helps shape your insurance premium. Why? Simply put, your credit score gives insurance companies an understanding of how responsible you are about debt. And their research has shown that financial responsibility translates into responsibility behind the wheel.
Why credit matters
Insurers use a variety of information from your credit report, like how many accounts you have, your outstanding balances and whether you pay your bills on time, according to the Federal Trade Commission (FTC). If you're behind on payments, your credit score likely will be dinged, which, in turn, could affect your insurance score.
According to the FTC, scoring systems are developed by selecting random samples of customers and statistically analyzing them to identify characteristics that relate to risk. Those characteristics then are assigned a weight and used to help predict risk. Customers who constantly are behind on payments with other accounts are risky to insurance providers and therefore may be charged a higher rate. After all, if a customer is late making his credit card payments, there's a chance he'll be late on paying his insurance premiums as well. And, according to the FTC, insurers have found that customers with bad credit tend to file more insurance claims.
According to Nationwide, credit scoring is a fair way to make sure customers are paying the right rates. In fact, according to the insurer's website, while some might see raised premiums, about half Nationwide's customers earn premium discounts because of their good credit histories.
Socioeconomic issues should have nothing to do with how much you spend on auto insurance, some say. For example, the Massachusetts Association of Insurance Agents (MAIA) wants the issue put to a vote, according to the Insurance Journal. The group is pushing to have a petition placed on the Massachusetts ballot in 2012 that could prevent insurers from using credit history, education or occupation to determine premiums.
"Using these factors to set auto rates is simply unfair, discriminatory, and unreliable," Frank Mancini, president of MAIA, told the Insurance Journal in August 2011. "Two people living in the same neighborhood with identical driving records should not be charged different rates because one lost their job or fell behind on their medical bills."
Low credit scores sometimes result from financial hardships, MAIA points out, and when drivers are charged higher auto insurance rates because of unattractive scores, their money problems are exacerbated. Rather than add to their financial woes, these drivers might choose to take a risk and drive without insurance. Moreover, many people don't have their good spending habits reported to credit agencies because they choose not to have credit cards -- and could therefore get penalized with higher premiums even though they don't pose an elevated risk.
Improving your credit
Even if insurance companies eliminate credit report checks, it's a good idea to keep an eye on your credit. Maintaining an attractive credit report can do wonders for your purchasing power. It not only helps drive down the cost of auto insurance, but makes it easier to finance a new vehicle or home. Once a year, you can get a free copy of your credit report from Equifax, Experian and TransUnion.