One’s credit profile is a living, breathing representation of a consumer’s ability to manage their financial responsibilities over time. A credit score is an algorithmic calculation that quantifies and gauges one’s creditworthiness. Essentially, a credit score is a snapshot of one’s risk level at any given moment.
You might be wondering: How did credit scores grow to be such a reliable indicator of future choices – good and bad!
If your credit score has recently hit the skids, don’t be surprised to find that it is more difficult to obtain a mortgage or, to find competitively priced car insurance. Does this mean your less-than-perfect credit precludes you from securing auto insurance coverage? Well, it’s complicated.
Still wondering if there is car insurance for people with poor credit? Read on to learn more.
The Relationship Between Insurance and Credit
Describing how a credit score predicts potential insurance losses is a bit like trying to nail Jell-O. However, the indisputable connection between the two has been denoted in a published Federal Trade Commission (FTC) Study.
The results effectively demonstrate the prognostic value of credit scores with regard to potential losses of an insured. Moreover, actuarial studies indicate that the manner in which a person handles their financial responsibilities is a dependable predictor of an insurance company’s conceivable losses.
Insurance companies maintain their own meticulous statistics that have revealed a similar correlation between a credit score and the average claim paid for that credit score range.
The industry’s statistics support the FTC’s results – the lower one’s credit score, the more likely it is that they will file an insurance claim. Elevated risk profiles might cause a rise in your monthly premiums to compensate for the additional risk your poor credit score poses.
While most insurance companies include a credit score when analyzing a potential insureds application, there are still other auto insurance companies that don’t check credit. Should you be concerned about how an insurance underwriter would rate your credit, get a jump start and order a free annual credit report offered by one (or all) of the major credit repositories.
With your credit score in hand, you can now decide if it is prudent to begin your insurance research with a company that provides car insurance without a credit check or to look into an insurance company with mitigated insurance guidelines.
The Impact of Poor Credit On Insurance Costs & Availability
As noted above, auto insurance companies consider the varied and many facets of your life when underwriting your insurance application. This complex analysis includes the following:
• Driving record (history)
• The vehicle
• The car’s location
• The driver’s gender, among others
Additionally, most insurance companies augment their evaluation by including your credit score in the mix, as this measurement reflects your financial and legal histories, which ultimately contain a predictive value.
For instance, maintaining a credit score that exceeds 650 (the start of the ‘fair credit range’) would qualify you for more advantageous premiums and coverage than someone with a score of 570.
High-risk candidates usually find themselves relegated to riskier insurance pools. These ‘high-risk’ pools recommend a cautious approach by limiting coverage and/or increasing premiums.
Finding No-Credit-Check Car Insurance
Automobile insurance providers didn’t start using credit scores until the mid -1990’s.
Since then, the insurance industry trends towards the belief that it is prudent to include an applicant’s credit score when assessing their risk profile. However, perceptive insurance companies paying attention took notice that a sizable portion of potential customers (with poor credit) would find themselves in a pickle – without a viable insurance option. These observant insurance strategists saw the unmet need and created insurance products for those in need of bad credit car insurance.
Those insurance companies who voluntarily created non-credit based car insurance as a business strategy – found many consumers in need of cheap car insurance with bad credit.
One of the main purposes of a credit score is to help determine if a consumer will make payments on time, and as scheduled. Insurance companies use this repository information to determine if their potential insured will be able to meet their monthly premiums, as promised.
Here’s the kicker:
Obtaining an auto insurance quote without a credit check is easier if you choose NOT to pay your yearly insurance premiums over 12 months. In other words, if you pay the insurance policy in full, up-front, your financial credit history’s impact becomes less significant.
A lump-sum payment eliminates an insurance company’s concerns about timely payments, which helps reduce outstanding concerns about risk. Ironically, some insurers offer discounts to customers who pay in full when the policy begins.
Do Large Insurance Companies Utilize Credit Scores?
A survey by Conning and Co revealed that more than 90% of major insurance companies employ credit-based scoring models to determine appropriate insurance coverage and premiums. However, some states (like Georgia, Hawaii, Maryland) actually prohibit the use of only a credit score as a basis for insurance approvals.
Still, other states prohibit insurance companies to deny coverage based entirely on the basis of a credit score. Further, Hawaii, Massachusetts, and California, actually prohibit insurers from setting price premiums based upon credit scores.
Companies that use Credit Scores
• GEICO – where allowed by law, credit information acts as one part of how insurance premiums are determined
• All State – offers no credit check car insurance, typically the highest premiums for car owners
• State Farm – while the credit score is applicable, agents have no access to full reports
• Progressive – where allowed by law, Progressive periodically reviews credit reports
The Bottom-Line: Improve Your Credit Score
Recognize that maintaining a good credit profile is a sure-fire way to reduce the cost of insurance, and the effort required to obtain insurance.
If any insurance/finance company denies you coverage based on the contents of your credit report, take advantage of the Fair Credit Reporting Act’s (FCRA) requirements that allow you to receive a free copy of your credit report after each declination.
Grab a hold of your credit score destiny by paying your bills on time, maintaining low credit card balances, and avoiding the temptation of snatching more credit than you actually need.
Check your credit report often, as this colossal amount of data churning through a credit repository is known to report erroneous information. The removal of these errors falls on the consumer, who must challenge the misreported information if they are to make any progress.
However, for a price, auto insurance is available to both good and, not so good, drivers despite the quality of their credit profiles. Consumers are advised to take great care and to do their due diligence before agreeing to just any insurance policy.
Remember, a credit score is never static which means you can always improve it with diligence and effort.