I've heard that a high credit score helps significantly reduce the cost of insurance. Is that true and why?

Question

I've heard that a high credit score helps significantly reduce the cost of insurance. Is that true and why?

Answer 1

One argument I heard about the low score/more claims correlation is that people with low scores typlically don't handle their money very well and find themselves financially strapped.  They will then file a claim every time something happens to their house, car, etc in the hopes of getting "free money" from insurance.  They will also sometimes exaggerate the claim to try to get even more money.  Even if the company can deny the claim because it's not covered under the policy contract the company still incurs an expense for handling the claim, causing these low score people to  cost the company more than the higher score people.  I'm not saying that this is the way it really is or that all people with poor credit do this, but the reasoning does make some sense.

Answer 2

It is true, a high credit score shows you as a responsible adult that can handle yourself which insurance companies translate into a "low risk" which qualifies you for the lower rates available.  Somebody with a poor credit rating has basically ruined credibility for themselves not just financially but in regards to responsibility.

Answer 3

True.  

Most states, except CA (and I"ve heard it's changing for CA) allow credit score to be either a rating factor, or an eligibility determination.  This is because the raw data shows that people with lower credit scores have more claims, and higher claims, than people with higher credit scores.  

The raw data I saw, had 702 as the "break even" credit score, where they paid out $1 for every $1 in premium.  Significantly lower credit scores - like in the low 500's, they pay out $2 for every $1 in premium.

Why are there more/higher claims for people with low scores?  Who knows.  No one has bothered to try to figure it out, because it's NOT RELEVANT.   Why do 16 year old boys have more accidents?  Who knows.  We can all guess, but all that really matters, is that the data shows a clear corrolation.

Answer 4

Insurance companies feel that if you are not responsible with your money, then you are more than likely not going to be responsible on the road.