When it comes to insurance, it boils down to risks. Insurance companies consider several things to determine how much risk is involved in insuring a particular driver. For example, they look at 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 auto insurance they’ll likely 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, if they have any accounts in collections, and how frequently they take out new credit.
Why does it matter? 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 get into fewer accidents.
It’s a controversial premise. In fact, it’s so contentious that the Federal Trade Commission (FTC) got involved by conducting its own independent study. The FTC study showed precisely the same thing as the previous studies. Credit is a good predictor of how risky a particular driver will be and whether they will end up making a claim.
Still, not every state allows insurers to use credit scores when determining a driver’s premium. For example, California, Hawaii, Michigan, Massachusetts, and Washington have banned the practice.