When it comes to insurance, it comes down to risk. Insurance companies consider several things when determining the level of risk involved in insuring a particular driver. For example, they review a person’s driving record to see if there are any speeding tickets, accidents, or other indications of risky driving habits. They look at the number of claims a driver has on their record. And they also look at a driver’s FICO® score. The less risky a driver is, the more affordable car insurance they will receive.
A driver’s FICO® score does not indicate how well a person drives. Still, it gives insurers an idea of how long the driver has had access to credit, how well they pay their monthly bills, whether they have any overdue accounts, and how often they take out new credit.
Why is this important? Insurance companies check credit scores because, according to research, drivers with low credit scores are more likely to file an insurance claim, and those with higher scores tend to have fewer accidents.
This is a controversial premise. In fact, it’s so controversial that the Federal Trade Commission (FTC) got involved by conducting its own independent study. The FTC study showed exactly the same as previous studies. Credit is a good predictor of a particular driver’s level of risk and whether they will eventually make a claim.
Yet not all states allow insurers to use credit scores to determine a driver’s premium. For example, California, Hawaii, Michigan, Massachusetts and Washington have banned this practice.