Q. I was told that your credit score influences your car insurance rate. Is that true?
A. It is indeed true that your credit score will impact your car insurance rates, but not in the direct way you might imagine.
Auto insurers concoct their own scores in an effort to predict both how likely you might be to file a claim and your overall creditworthiness, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.
“Also known as credit-based scores, these ratings are developed based on the concept that there is a direct and measurable relationship between how you manage your financial life, as reflected in your credit score and your insurable risk as an automobile owner,” Mott said.
She said each insurance company has the option of generating a score for anyone applying for auto insurance, and according to the New Jersey Department of Banking and Insurance, they must notify policyholders if they subscribe to the practice.
“The roughly 130 factors that comprise your credit report may be used in a scoring model which has weights assigned to the different components,” she said. “The result is often a three-digit number which may bear no resemblance to your credit score.”
The factors and weightings used by the auto companies are proprietary and they are not required to share your score with you, Mott said.
In general, it is thought that the factors which will typically be used are:
• Collection and late payment history
• Length of credit history
• Number of credit inquiries (from applying for loans or credit cards)
• Open credit lines and outstanding debt
• Types of credit being used
Under no circumstances can factors such as age, sex, ethnicity, religion, income or address be included in the calculation, she said.
And in New Jersey, Mott said, auto insurers must make exceptions if your credit history has been negatively impacted by an extraordinary life event such as:
• Catastrophic illness or injury
• Death of a family member
• Temporary unemployment
• Identity theft
In view of this relationship, it is wise to have as favorable a credit history as possible by reviewing your credit report regularly, Mott said.
You can get a free copy of your report each year from the three credit bureaus at www.annualcreditreport.com.
“In particular, keeping all accounts in good standing, paying on time and maintaining a low credit utilization ratio — amount of credit used compared to total credit available — may help boost the score a potential auto insurance provider creates for you,” Mott said. “It is important to avoid making numerous applications for credit if you are going to be shopping for auto insurance as it will have a negative impact on the score.”
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