Does Your Credit Rating Affect Your Car Insurance Premiums?

Credit ratings reflect a consumer's financial health at a given point in time. A credit rating, or score, is calculated on the basis of five primary factors, some of which weigh more heavily than others. Consumers with low credit ratings have difficulty qualifying for loans and credit cards, but credit ratings also affect home and car insurance premiums.

Ratings

Credit ratings are numerical indicators that potential creditors, insurance companies and some employers use to assess the risk of lending money and insuring or hiring someone. Credit ratings, or scores, range from 350 to 800. Lower credit ratings translate into higher interest charges and higher home and car insurance premiums.

Factors

The five main considerations in calculating your credit rating are your payment history (35 percent), outstanding debt (30 percent), credit history (15 percent), credit types (10 percent) and new credit (10 percent). Of these, potential lenders are most concerned with your payment history. Insurance companies pay attention to your credit history in determining your insurance premiums.

Practice

All commercial lending institutions review your credit rating along with your loan application. The CBSnews website reports that 90 percent of insurance companies use your credit history and credit rating to determine if you are an insurance risk. Even if you have never had an accident, a poor credit score can result in higher insurance premiums.

Reasoning

Although it seems reasonable that potential creditors would be concerned with your payment history and credit rating, it may be harder to understand why potential insurers would also be concerned with your rating. According to CBSnews, a representative of the National Association of Independent Insurers explained that people who manage their personal finances responsibly will also be more responsible in maintaining their home and when behind the wheel of a car.

Legislation

According to MSNBC, California, Massachusetts and Hawaii ban the use of credit ratings to determine car insurance premiums. Maryland bans the use for homeowner's premiums. During 2009, 16 states considered bills to ban the use of credit ratings as a consideration for insurance premiums. In 2010, the Michigan Supreme Court ruled that credit ratings can be used to calculate insurance premiums. The issue of insurance-scoring is ongoing. Insurance companies are fighting bans whenever legislative bills are proposed, but consumer-driven advocates are not backing down.