Why Your Credit History Affects Your Car Insurance
Each insurance company has different formulas for how they determine their rates.
There is no one insurance company that is cheap for everybody.
That is why you have to shop around.
Your neighbor, living in the same kind of house, driving the same kind of car, and nearly the same age as you, may get a completely different rate from the same insurance company.
Some of the factors that go into determining rates are a person's age, sex, geographical location, occupation, driving habits, lifestyle, driving record, and claims history.
A new feature was added in the early 90's--credit history.
An insurance company is a business whose primary goal is to make a profit.
They are in the business of gambling.
They are gambling that the person they promise to indemnify will not ultimately need their money.
So their goal is to look to indemnify people who are least likely to have a claim.
If they are too restrictive about whom they insure they will not have enough customers to pay enough premiums.
They will not be competitive.
Likewise, if they are too lax about whom they insure, too many claims will be filed and the insurance company will run out of money.
So they gather an enormous amount of statistical data to try to spot trends that will help predict the likelihood that certain kinds of people will file a claim.
In the past, underwriters would just make a judgment call on how prone an individual might be to having an accident.
Obviously, someone who gets a lot of traffic tickets, or who has a history of accidents has demonstrated that they are not a safe bet.
The company will likely lose money on this individual.
But underwriters are only human and could not possibly be as accurate as the company would like.
Imagine, however, if you happened upon an unrelated statistic that paralleled a reality manifested elsewhere.
What if you discovered, for example, that people who ate orange sherbet had a ninety percent chance of buying Nike cross-training shoes? You would have some very valuable information that would be useful to both Nike and orange sherbet makers.
In the early nineties, a credit reporting agency discovered that people with bad credit also demonstrated a very high likelihood of filing an insurance claim.
This discovery was met with initial skepticism.
In fact, the head statistician at one of the leading property and casualty insurance companies set out to disprove the connection between credit and claims.
Instead he became so absolutely convinced of its reality that the company changed its entire underwriting guidelines.
So accurate was the comparison, he said, that the company could with certainty determine that a person with bad credit and no accident history was more likely to file a claim than a person who had several accidents and excellent credit.
Companies have since developed their own algorithms based on various credit characteristics.
For instance, it is may not necessarily be a person's credit score that predicts future claims, but the number of "consumer generated inquiries".
In science fiction books and movies, there are stories of future behavior being predicted based upon statistics such as a person's DNA.
As technology advances, we have entered an age of ethical dilemmas as to how far we should go in predicting someone's future actions.
Credit and claims prediction is still very controversial and is not legal in some states.
However, knowing what you can about how your rates are determined can help you change the circumstances that will help to lower your insurance premiums.
There is no one insurance company that is cheap for everybody.
That is why you have to shop around.
Your neighbor, living in the same kind of house, driving the same kind of car, and nearly the same age as you, may get a completely different rate from the same insurance company.
Some of the factors that go into determining rates are a person's age, sex, geographical location, occupation, driving habits, lifestyle, driving record, and claims history.
A new feature was added in the early 90's--credit history.
An insurance company is a business whose primary goal is to make a profit.
They are in the business of gambling.
They are gambling that the person they promise to indemnify will not ultimately need their money.
So their goal is to look to indemnify people who are least likely to have a claim.
If they are too restrictive about whom they insure they will not have enough customers to pay enough premiums.
They will not be competitive.
Likewise, if they are too lax about whom they insure, too many claims will be filed and the insurance company will run out of money.
So they gather an enormous amount of statistical data to try to spot trends that will help predict the likelihood that certain kinds of people will file a claim.
In the past, underwriters would just make a judgment call on how prone an individual might be to having an accident.
Obviously, someone who gets a lot of traffic tickets, or who has a history of accidents has demonstrated that they are not a safe bet.
The company will likely lose money on this individual.
But underwriters are only human and could not possibly be as accurate as the company would like.
Imagine, however, if you happened upon an unrelated statistic that paralleled a reality manifested elsewhere.
What if you discovered, for example, that people who ate orange sherbet had a ninety percent chance of buying Nike cross-training shoes? You would have some very valuable information that would be useful to both Nike and orange sherbet makers.
In the early nineties, a credit reporting agency discovered that people with bad credit also demonstrated a very high likelihood of filing an insurance claim.
This discovery was met with initial skepticism.
In fact, the head statistician at one of the leading property and casualty insurance companies set out to disprove the connection between credit and claims.
Instead he became so absolutely convinced of its reality that the company changed its entire underwriting guidelines.
So accurate was the comparison, he said, that the company could with certainty determine that a person with bad credit and no accident history was more likely to file a claim than a person who had several accidents and excellent credit.
Companies have since developed their own algorithms based on various credit characteristics.
For instance, it is may not necessarily be a person's credit score that predicts future claims, but the number of "consumer generated inquiries".
In science fiction books and movies, there are stories of future behavior being predicted based upon statistics such as a person's DNA.
As technology advances, we have entered an age of ethical dilemmas as to how far we should go in predicting someone's future actions.
Credit and claims prediction is still very controversial and is not legal in some states.
However, knowing what you can about how your rates are determined can help you change the circumstances that will help to lower your insurance premiums.
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