Reader question:

My best friend’s name is Jack, and we don’t have a lot of difference between us. We got married around the same time, had our first kids around the same time. We drive the same kind of car (I got it first) and neither of us have ever had any problems with our driving records. He lives around the block from me. So why is that I pay so much more on my car insurance premium, while he gets the cheapest car insurance?

Albert

I can make a guess.

Looked at with the naked eye, insurance premiums can seem like they are being chosen at random. As though the insurance companies are choosing you, specifically, to suffer for no other reason than that to you fell the burden. This comes to light especially when you compare people that you would say are like you in every way, at least in the eyes of the car insurance industry. However, a lot more is involved in the premium rate decision process these days. Used to, there were only a couple of factors that went into the decision to charge you a certain rate. These were:

• your age.
• your gender.
• your driving history.

However, nowadays, it is much more complicated. It’s not easy to determine, without looking at the car insurance company’s records, why Jack is paying less than you are.

However, I can give you one thing it might be. One of the newer factors that is still fairly controversial is your FICO credit score. These have a big impact on your car insurance rates, even if just from thinking about it it’s hard to figure out what your credit has to do with your ability to keep your car out of the ditch. The car insurance companies think it does have to do with it, though, and if you look at the facts, you’ll see that even if you are great in every other category, a bad credit score will get you a high insurance premium. And even if you are less than stellar in every category, a good insurance score can save you a lot of money. Just another reason to pay your bills, if having running water wasn’t enough incentive.

So what’s the difference?

If you have a good credit score, your car insurance premium will be rated at almost half the price of other peoples. So why do insurance companies even get to use this? Well, in their constant efforts to separate people into groups so that they can charge people more for being part of these groups, they discovered that people with worse credit scores tend to file more car insurance claims. This either means that people with higher scores are better drivers, or they are financially secure enough to not need to file as much. Either way, insurance companies see it as an excuse to raise prices for low credit score customers.

How is that legal?

The right of it is still up for debate. There are a lot of states where the use of credit scores to affect car insurance rates is going through the court system, but the jury is still out. In a few states, it may happen that it won’t be allowed to be used as a factor, or it won’t be allowed to have as much of an importance in the final premium rate decision. However, for the moment it’s an acceptable way of creating risk groups for your car insurance company, and so you should expect to be effected by it.

If you have a bad credit score, you don’t have to give up hope. Aside from trying to improve your credit, which you should be doing anyway, you can do other things to keep your car insurance rates down. Even someone with bad credit can get very cheap car insurance. These are the usual ways, such as finding out about discounts, raising your deductible, and shopping around before settling with an auto insurance company.

Cheers,

Fashun Guadarrama.