The Cost of Bad Credit and Auto Insurance

Over the past few years, auto insurance in the state of Texas has evolved rapidly. With all the changes, insurance carriers are left struggling to keep up while insureds constantly have to deal with rate increases. Finding cheap car insurance in Texas can pose a real challenge, but understanding how insurance companies determine your premium will give you an advantage. Those who are getting the cheapest car insurance rates have good credit.

The formulas that determine your car insurance rate are extremely varied and complex. Most people know that loss history, driving records, vehicles, and age of the driver are important factors; however, one of the most influential factors for cheap car insurance is good credit. Good credit can get you cheap car insurance faster than any of the aforementioned factors, Almost all insurance companies in Texas use what is called the “credit-based” insurance factor, meaning bad credit causes higher premiums and good credit can get you cheap car insurance.

It is important to understand the difference between credit score and credit based-insurance. Actual numerical credit scores are used by banks to determine your ability to repay a loan. They often consider factors that insurance companies do not, like employment, income, or debt-to-income, for example. Insurance companies do not use all the information that is factored into an actual credit score, but they do use your overall credit profile as a rate-determining factor. For example, does your credit report show derogatory credit, delinquencies, or bankruptcies? These negative factors can put you into a higher risk category and prevent you from getting cheap car insurance in Texas.

Insurance companies use credit-based rates because it has been proven that individuals with bad credit are more likely to have claims than individuals with good credit. For example, a study done by the University of Texas surveyed over 175,000 policies from various different insurance companies. These policies were broken down by credit of the insured versus claim activity. It revealed that individuals in the bottom 10% of the credit profile (meaning 90% of the general population had better credit than they did) had 53% more claims than the average person. Also, individuals in the top 10% of the credit profile had 25% less claims than the average person.

When companies started offering cheaper car insurance to people with good credit, the Federal Trade Commission launched its own investigation. They published a report to Congress in 2007, independently determining that credit is a legitimate factor that can be used to predict the likelihood of accidents and to determine insurance rates. Moreover, they also showed that not only do those with good credit have fewer accidents, but claims made by “good-credit drivers” tend to be less costly than claims by “bad-credit drivers”.

In essence, having good credit is imperative if you want cheap car insurance in Texas. Having a long, established credit history with several lines of credit will definitely help you get cheap car insurance, especially when coupled with a good driving history too. On the other hand, a credit history that shows late payments, collections, excessive debt, or lack of credit history can prevent you from getting the cheapest car insurance rates.

Many times young people who try to get their own insurance for the first time discover that rates are extremely high, and a common misconception is that it’s because of their age. Although age certainly has a lot to do with rates, youthful drivers have the disadvantage of not having a long driving history, but they also will typically lack a strong credit history. In Texas, young people are now starting to discover that by establishing a good credit early, it can actually help them to get cheaper care insurance rates.

Another example where credit affects premiums is at renewals. Most auto insurance companies in Texas will review policyholders’ information periodically, and they use these updates to determine your new premium at renewals. Some insureds experience a nasty surprise at renewals: they used to have cheap car insurance, but now their premiums have increased substantially even though they’ve had no accidents or claims. Although this can happen because of a standard or statewide increase, it can also happen if there have been changes to your credit. Good credit will continue to get you cheap car insurance over the longevity of the policy, while bad credit will prevent you from getting cheaper car insurance over the longevity of the policy.

It’s important to discuss with a professional how credit-based insurance can help you get cheap car insurance. Texas is not a state where it’s easy to find cheap car insurance, so understanding the impact credit has on your rates is imperative. Get in touch with an insurance professional to discuss finding cheap auto insurance today.