Why does your credit affect your auto insurance rate?
Example - I have an excellent credit rating. I take extremely good care of my car, I have no speeding tickets or accidents, my premium has never been paid a day late. My friend has awful credit. Her car is trashed, multiple accidents and tickets, her premium is always paid late and often lapses and reinstates. Maybe a coincidence but I think in general the thought is a person that takes care of their credit will be a more responsible driver and customer.
Because the research proves that people who have lower credit scores file more insurance claims.
One large major company found that their lowest 4% of their policyholders on the credit scoring scale filed 10 TIMES more claims than the top 4%. (And, its not because the top 4% are richer.....remember credit scoring does NOT take into account income....only your past payment history).
So true to the insurance-risk model.....if it is proven that people with lower credit scores file more insurance claims, then people who have lower credit scores SHOULD have higher premiums.
And, think of this......just how accurate are driving records anyway? How many times have you been pulled over and either not given a ticket or the officer marked down the number of miles per hour over the limit you were so that it wouldn't show up on your driving record.
Then, consider this.....many municipalities in my state allow people with tickets to plead a "continuance for dismissal" so that if you pay a fee (usually about $150-200), they will hold the ticket in abeyance and if you don't get another ticket in the same jurisdiction for one year, the original charge is dropped and never shows up on your record at all.
Also consider this......
Most people have good credit. Credit scoring usually means anywhere from 2/3rds to 3/4ths of the driving public actually get a discount. The surcharges on those with bad credit make up for it, which is exactly how it should be.
Or put another way......in states like Maryland and Oregon where credit scoring is banned......people with good credit are forced to pay more....in effect...to subsidize those with bad credit who are filing more claims.
In Oregon they are trying to pass a law to make it illegal to do so. But if you think about it who would not want this except folks with bad credit. Because if like me you have great credit then your rates will be reduced because they believe you are less likely to have an accident or ticket. If you have bad credit and they make it illegal to use credit then I will end up subsidizing the people with bad credit. because the companies are going to make sure they get a certain amount of money per policy.
Insurance companies believe that the way you pay your bills has a correlation with claims. Not sure I believe this, but they do.
Because everything revolves around your ability to pay your bills. Your credit rating isa reflection of that fact.
It shouldn't but it does. It is just another reason they thought of to charge you more. If they could charge more because you were short, tall, blue eyes, etc. they would but it would be too obvious, so they use 'credit' and (if a student) grades and any other reason they can think of to charge more.
Answers:
Your credit report is one of several, up to a hundred or more in some cases, things that are looked at by insurance companies to determine your premium. An insurance company has to get a feel for what type of person they are writing a policy and assess the risk of that person, a credit report is one way of assessing what type of risk a person will be. Agreeably it can be unfair in some situations, i.e.-horrible credit, and good driving record. But for the most part there is a pretty strong correlation between poor credit and increased risk of non-payment of premiums, increase in accidents and increase in the severity of accidents that they are involved with.