- There is evidence indicating that the lower a person's credit score, the more likely they will be to file an insurance claim. Also, the amount of the claim is $360 higher for those with low credit scores, according to a study conducted by the University of Texas. Therefore, insurers believe they need to charge higher premiums to make up for the additional losses.
- In the insurance industry, a company's loss ratio is the dollar value of claims paid out divided by the amount of premiums collected. Hence, the higher the loss ratio, the less profitable the company is. The previously-mentioned University of Texas study also indicated that the higher the number of items in collections on an insured's credit report, the higher the loss ratio was for that insured.
- There is no definitive reason why bad credit leads to higher claims. One theory is that people who have bad credit are less responsible in general, which carries over into areas such as driving habits and the diligence of their vehicle maintenance. Another theory is that people with less money are more likely to live in areas where vehicle thefts and vandalism occur.
- Insurers may also believe that a poor credit history will affect the ability to make timely premium payments. This can result in the insurer canceling a policy, which affects the profitability of their business, as well as having to employ more people or hire a collection agency to track down late premium payments.
- The argument against using credit scores as part of car insurance rating is that it can unfairly penalize a good driver. For example, if a driver has no history of auto claims or moving violations, but may have been late on a credit card or mortgage payment, he would pay a high premium for no apparent reason.
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