Auto Credit Insurance
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What is Auto Credit Insurance?
Your auto insurance rate is determined to a degree by your credit score.
Many insurance companies look at a consumer's credit history to decide if to issue an auto, home or life insurance policy of personal insurance and how much to charge. This practice is known as credit scoring or insurance scoring.
Insurance companies have a strong economic incentive to try to predict risk as accurately as possible. In a competitive market for insurance in which all firms have access to the same information about risk, competition for customers will force insurance companies to offer the lowest rates that cover the expected cost of each policy sold. If an insurance company is able to predict risk better than its competitors, it can identify consumers who currently are paying more than they should based on the risk they pose, and target these consumers by offering them a slightly lower price. Thus, developing and using better risk prediction methods is an important form of new competition among insurance companies.
For decades, insurance companies have divided consumers into groups based on common characteristics which correlate with risk of loss. Automobile insurance companies divide consumers into groups based on factors such as age, gender, marital status, place of residence, and driving history, among others. Once insurance companies have separated consumers into groups based on these characteristics, they use the average risk of each of these groups in helping to determine the price to charge members of the group.
Insurance companies report that during the last decade they have begun to use credit-based insurance scores to assist them in separating consumers into groups based on risk. Insurers have long used some credit history information when evaluating insurance applications, for example, considering bankruptcy in connection with offering homeowners insurance. In the early 1980s, insurance companies and others began assessing the utility of using additional information about credit history in assessing risk, leading to a more formal use of such information in a fairly simple manner by the early 1990s.
In the early 1990s, Fair Isaac Corporation (Fair Isaac), drawing on its experience developing credit scores, led the initial research to develop automobile insurance price quotes insurance scores. The company developed the first "modern" credit-based insurance score and made it available to insurance companies in 1993. This score was developed to predict the likelihood of claims being submitted for homeowners policies. Fair Isaac introduced a credit-based insurance score for automobile policies in 1995, and ChoicePoint introduced
- Use a policyholder's credit information to raise premiums for an existing policy.
- Cancel or refuse to renew existing policies because of credit history problems.
- Use credit information as the only factor to decide whether to issue a policy.
Use credit information when deciding whether to issue a new policy but only if it is part of an evaluation system that uses other factors and they can document that it helps them predict future claim costs and price their products. If credit history is used, insurance companies and agents must:
- Explain how the company uses credit information before running a credit check.
- Notify you before running a credit check.
- Explain any "adverse decision" - such as not offering a policy or the best rate.
Insurance Rating categories
If you are approved for coverage, the insurance company will place you in one of three basic categories of drivers: preferred, standard, or nonstandard.
Preferred: Drivers who are the best risks, which usually means the safest drivers. Preferred drivers have maintained clean driving records for the past three years and pay the lowest rates.
Standard: Drivers who are moderate risks. Rates for standard drivers are higher than those for preferred drivers. People in this category usually drive "family" cars and have reasonably clean driving records.
Nonstandard: Drivers who are high risk. They pay the highest rates for insurance. This category may include drivers under 25, drivers with little experience, drivers with histories of tickets or accidents, drivers with poor premium payment records, and drivers with convictions for driving recklessly or under the influence of alcohol or other drugs.
Insurance companies increasingly are using credit-based insurance scores in deciding whether and at what price to offer coverage to consumers.
Credit-based insurance scores are effective predictors of risk under automobile policies. They are predictive of the number of claims consumers file and the total cost of those claims. The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer. Thus, on average, higher-risk consumers will pay higher premiums and lower-risk consumers will pay lower premiums.
Use of credit-based insurance scores may result in benefits for consumers. For example, scores permit insurance companies to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers for whom they would otherwise not be able to determine an appropriate premium. Scores also may make the process of granting and giving auto insurance price quotes with relevant pricing data quicker and cheaper, with cost savings passed on to consumers in the form of lower car insurance premiums. However, little hard data was submitted or available to quantify the magnitude of these benefits to consumers.
How to Shop for Auto Insurance
