You probably are wondering why your credit rating affects your auto insurance policy when you aren’t borrowing anything at all when you purchase an auto insurance. Reality is in most states, credit rating is a big factor in calculating your auto insurance premium. This is because insurers have realized that there is a relationship between losses that the insurance provider will pay benefits on, and the credit rating of the insurer. Proof of this can be reviewed in the 2004-2005 study in Texas comparing credit rating and general risks.

Credit Study Finding on Auto Insurance Losses

The Texas Department of Insurance gathered data on a couple of million auto insurance policies from firms that offer private passenger auto insurance. They then compared the loss claims of these policyholders versus their credit ratings. What they discovered was a direct relationship between loss and poor credit scores. The policy holders with the lowest credit scores are actually reporting twice the average loss per vehicle than those people with the best credit rating.

Credit Study Finding on Car Accidents

The study also determined the correlation between the rate of accidents and credit rating scores. The finding showed that drivers with the lowest credit scores were involved in about 40 percent more car accidents than those drivers with the best credit scores.

Credit Rating and Auto Insurance

The Texas study has been tied up with other studies that prove similar relationships between credit rating and losses insurance. For the purposes of insurers, a credit score of 700 and above is actually considered good. However, a score of 600 or lower is bad. Not every state will consider credit rating as part of calculating auto insurance rates.  However, the Federal Trade Commission has already approved of this technique as pointing to an increase in the correctness and accuracy of underwriting policies. The use of credit ratings as determinant in auto insurance rate is in dispute in other states.  Some of the states that consider credit ratings are required to let applicants know if their credit ratings affected the decision on their auto insurance policy.

How to Use Your Credit Rating When Purchasing Auto Insurance

When you first plan to buy an auto insurance policy, you should first know if credit rating is considered a factor in your state. If this is so, you must then find out what your credit score is through a credit reporting agency. If you have a score that is below 700, you should consider taking actions on how to raise your score before you can buy an auto insurance policy.