Your credit score might cost you more to drive
Not happy with your credit score? Look again this fall, when changes in how credit bureaus calculate credit scores take effect.
Scores will become more forgiving of debt as the new credit scoring model developed by the three major credit reporting bureaus will put more weight on payment trends (e.g., paying down debt), so lenders get a more holistic view of overall credit behavior and risk level.
The change is expected to increase the credit scores of certain debtors, who may have higher average debt levels, but are carrying it well.
That’s good news, especially considering that credit scores affect more than loans. Credit scores also impact car insurance rates — a fact rarely discussed, but which results in some drivers paying more, even with good driving records.
How auto insurers use credit scores varies by state and isn’t as straightforward as lenders; insurance companies use elements of credit reports to create their own risk number, a credit-based insurance score. In its July 2015 issue, Consumer Reports found that generally, drivers with the best credit scores pay less in auto insurance premiums, other things being equal. U.S. drivers who had “good” but not the highest scores paid up to $526 more per year. A “poor” credit score could result in up to $1,301 more in annual premiums.
The report’s state-by-state analysis compared average new-customer premiums for adult, single drivers with a clean driving record, and with poor, good, or excellent credit. In Idaho, such drivers with “excellent credit” (i.e., scores in the 800s) pay an average $853 per year. That’s the baseline. Those with only “good credit” (ball park 700) pay an average $105 more, and “poor credit” (lower 600s and under) means an average $1,576 more.
Keep in mind these are drivers with clean driving records. The report noted that “poor credit” category drivers with clean records actually paid higher premiums than excellent-credit drivers who got a DUI. The excellent-credit-with-DUI drivers paid $502 more than baseline, which is only a third of the $1,576 that clean-record-but-poor-credit drivers paid over baseline.
Why? The theory, according to insurer websites, is that consumer credit behavior is indicative of overall risk. It’s believed to indicate how likely a person is to make an insurance claim, although California, Hawaii and Massachusetts must disagree, because they don’t use it.
To get a free credit report and find tips to improve your credit score, see Experian.com.
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Sholeh Patrick is a columnist for the Hagadone News Network. Contact her at Sholeh@cdapress.com.