question: What exactly is the correlation between having great credit and auto insurance cost. When you are paying your premiums in advance.
comment: Having good credit shows a responsible adult behavior pattern, which contributes to good driving behavior pattern. There is no direct correlation between credit score and accident rate.
passages: Insurance companies have started using credit ratings of their policyholders to determine risk. Drivers with good credit scores get lower insurance premiums, as it is believed that they are more financially stable, more responsible and have the financial means to better maintain their vehicles. Those with lower credit scores can have their premiums raised or insurance canceled outright. It has been shown that good drivers with spotty credit records could be charged higher premiums than bad drivers with good credit records.
  
  Section::::Basis of premium charges.:Behavior-based insurance.
   Various studies have found a strong relationship between credit-based insurance scores and profitability or risk of loss. The scores are generally most predictive when little or no other information exists, such as in the case of clean driving records, or claims-free policies; in instances where past claims, points, or other similar information exist on record, the personal histories will typically be more predictive than the scores. Insurers consider credit report information, along with other factors, such as driving experience, previous claims and vehicle age, to develop a picture of a consumer's risk profile and to establish premium rates. The correlation, between credit-based insurance scores and overall insurance profitability and loss, has not been disputed.
   Auto insurance risk selection
  
  Auto insurance risk selection is the process by which vehicle insurers determine whether or not to insure an individual and what insurance premium to charge. Depending on the jurisdiction, the insurance premium can be either mandated by the government or determined by the insurance company in accordance to a framework of regulations set by the government. Often, the insurer will have more freedom to set the price on physical damage coverages than on mandatory liability coverages.
   Two of the most important factors that go into determining the underwriting risk on motorized vehicles are: performance capability and retail cost. The most commonly available providers of auto insurance have underwriting restrictions against vehicles that are either designed to be capable of higher speeds and performance levels, or vehicles that retail above a certain dollar amount. Vehicles that are commonly considered luxury automobiles usually carry more expensive physical damage premiums because they are more expensive to replace. Vehicles that can be classified as high performance autos will carry higher premiums generally because there is greater opportunity for risky driving behavior. Motorcycle insurance may carry lower property-damage premiums because the risk of damage to other vehicles is minimal, yet have higher liability or personal-injury premiums, because motorcycle riders face different physical risks while on the road. Risk classification on automobiles also takes into account the statistical analysis of reported theft, accidents, and mechanical malfunction on every given year, make, and model of auto.
   Insurance scoring models are built from selections of credit report factors, combined with insurance claim and profitability data, to produce numerical formulae or algorithms. A scoring model may be unique to an insurance company and to each line of business (e.g. homeowners or automobile), in terms of the factors selected for consideration and the weighting of the point assignments. As insurance credit scores are not intended to measure creditworthiness, they commonly focus on financial habits and choices (i.e., age of oldest account, number of inquiries in 24 months, ratio of total balance to total limits, number of open retail credit cards, number of revolving accounts with balances greater than 75% of limits, etc.) Therefore it is possible for a consumer with a high financial credit score, and excellent payment history, to receive a poor insurance score. Insurers consider credit report information in their underwriting and pricing decisions as a predictor of profitability and risk of loss. 
   A change to any of this information might result in a different premium being charged if the change resulted in a different actuarial class or risk level for that variable. For instance, a change in the drivers' age from 38 to 39 may not result in a different actuarial class because 38- and 39-year-old people may be in the same actuarial class. However, a change in driver age from 38 to 45 may result in a different premium because the records of the insurer indicate a difference in risk associated with those ages and, therefore, the age difference results in a change in actuarial class or assigned risk level.
   In most U.S. states, moving violations, including running red lights and speeding, assess points on a driver's driving record. Since more points indicate an increased risk of future violations, insurance companies periodically review drivers' records, and may raise premiums accordingly. Rating practices, such as debit for a poor driving history, are not dictated by law. Many insurers allow one moving violation every three to five years before increasing premiums. Accidents affect insurance premiums similarly. Depending on the severity of the accident and the number of points assessed, rates can increase by as much as twenty to thirty percent. Any motoring convictions should be disclosed to insurers, as the driver is assessed by risk from prior experiences while driving on the road.
   Studies have shown scores to be predictive of risk in the underwriting of both credit and insurance. Some studies even suggest that most consumers are the beneficiaries of lower credit costs and insurance premiums due to the use of credit scores.
   Another important factor in determining car-insurance premiums involves the annual mileage put on the vehicle, and for what reason. Driving to and from work every day at a specified distance, especially in urban areas where common traffic routes are known, presents different risks than how a retiree who does not work any longer may use their vehicle. Common practice has been that this information was provided solely by the insured person, but some insurance providers have started to collect regular odometer readings to verify the risk.
  
  Section::::Basis of premium charges.:Distance.:Odometer-based systems.
   Customers may also find that a dealer can get them better rates than they can with their local bank or credit union. However, manufacturers often offer a low interest rate OR a cash rebate, if the vehicle is not financed through the dealer. Depending upon the amount of the rebate, it is prudent for the consumer to check if applying a larger rebate results in a lower payment due to the fact that s/he is financing less of the purchase. For example, if a dealer has an interest rate offer of 7.9% financing OR a $2000.00 rebate and a consumer's lending source offers 8.25%, a consumer should compare at the credit union what payments and total interest paid would be, if the consumer financed $2000.00 less at the credit union. The dealer can have their lending institution check a consumer's credit. A consumer can also allow his or her lending source to do the same and compare the results. Most financing available at new car dealerships is offered by the financing arm of the vehicle manufacturer or a local bank.
   Conventional methods for determining costs of motor vehicle insurance involve gathering relevant historical data from a personal interview with, or a written application completed by, the applicant for the insurance and by referencing the applicant's public motor vehicle driving record that is maintained by a governmental agency, such as a Bureau of Motor Vehicles. Such data results in a classification of the applicant to a broad actuarial class for which insurance rates are assigned based upon the empirical experience of the insurer. Many factors are deemed relevant to such classification in a particular actuarial class or risk level, such as age, sex, marital status, location of residence and driving record.
   Conventional rating systems are primarily based on past realized losses and the past record of other drivers with similar characteristics. More recently, electronic systems have been introduced whereby the actual driving performance of a given driver is monitored and communicated directly to the insurance company. The insurance company then assigns the driver to a risk class based on the monitored driving behavior. An individual, therefore, can be put into different risk classes from month to month depending upon how they drive. For example, a driver who drives long distance at high speed in one month might be placed into a high risk class for that month and pay a large premium. If the same driver drives for short distances at low speed the next month, however, then he or she might be placed into a lower risk class and charged a lower premium.
   "The Impact of Personal Credit History on Loss Performance in Personal Lines", by James Monaghan ACAS MAAA. This actuarial study matched 170,000 policy records with credit report information to show the correlation between historical loss ratios and various credit report elements. 
  
  "The Use of Credit History for Personal Lines of Insurance: Report to the National Association of Insurance Commissioners", American Academy of Actuaries Risk Classification Subcommittee of the Property/Casualty Products, Pricing and Market Committee.
   BULLET::::- Credit/Life/Disability insurance: It is important to note that this kind of insurance is a profit center for the dealership, working similarly to the second type of service contract described above in this article and cannot be required as a condition of the loan. Customers / Borrowers often have the option of purchasing protection for their loan should the borrower become disabled and unable to work for a period during the time the borrower is required to make payments. Often the coverage begins on the 31st or 32nd day of disability: Meaning the borrower has to be unable to work for a period greater than 30 days before a claim can be filed. Often the borrower is required to submit paperwork to validate a disability claim. Credit Life insurance will usually cover the entire remaining balance of a loan if the borrower dies within the term of the contract. Customers can often obtain this coverage from their own insurance companies. Consumers should compare rates and policies with their own insurance companies. See Consumer Reports for their opinion
   Section::::Public information.
  
  Insurance credit-scoring models are considered proprietary, and a trade secret, in most cases. The designers wish to protect their models from view for a number of reasons: they may provide competitive advantage in the insurance marketplace, or they anticipate consumers might attempt to alter results, by changing the information they provide, if the computations were common knowledge. Thus there is little public information available about the details of insurance credit-scoring models. 
  
  BULLET::::- One actuarial study has been published, "The Impact of Personal Credit History on Loss Performance in Personal Lines", by James Monaghan, ACAS MAAA.
   "The Use of Credit Scoring in Automobile and Homeowners Insurance, A Report to the Governor, the Legislature and the People of Michigan", by Frank M. Fitzgerald, Commissioner, Office of Financial and Insurance Services. 
  
  This report reviewed the viewpoints of the industry, agents, consumers, and other interested parties. In conclusion, insurance credit scoring was found to be within the scope of Michigan law. 
   States where the sale of credit insurance is authorized were found to include at least one type of insurance included with loan contracts in 80% of cases. On average, the contracts analyzed included 2.67 insurance and other ancillary products. Consumers who refinance loan can be adversely affected by credit insurance because most of the money that consumers typically pay before refinancing is applies to fees and interest.
  
  The Federal Trade Commission has issued a consumer alert concerning various types of credit insurance, including credit life insurance. The FTC consumer alert includes credit insurance shopping tips for consumers seeking a loan.
   Most financial lenders in the United States require the financed vehicle to have collision coverage, and not just liability coverage, in order for the financial institution to cover their losses in case of an accident. Insurance requirements vary between financial institutions and each state. Minimum deductibles and liability limits (required by some leasing companies) would be outlined in the loan contract. Failure to carry the required coverages may lead to the lienholder purchasing insurance and adding the cost to the monthly payments or repossession of the vehicle. Vehicles purchased with cash or paid off by the owner are generally required to only carry liability. In some cases, vehicles financed through a "buy-here-pay-here" car dealership—in which the consumer (generally those with poor credit) finances a car and pays the dealer directly without a bank—may require comprehensive and collision depending on the amount owed for the vehicle.
   The classifications, such as age, are further broken into actuarial classes, such as 21- to 24-year-olds, to develop a unique vehicle insurance cost based on the specific combination of attributes for a particular risk. For example, the following information would produce a unique vehicle insurance cost:
  
  BULLET::::- Vehicle: Age - 7 years old; manufacturer, model - Ford, Explorer XLT; value $18,000
   Credit score and history, property use, property type, loan amount, loan purpose, income, and asset amounts, as well as documentation levels, property location, and others, are common risk based factors currently used. Lenders 'price' loans according to these individual factors and their multiple derivatives. Each derivative either positively or negatively affects the cost of an interest rate. For example, lower credit scores equal higher interest rates and vice versa; typically, those who provide less verifiable income documentation due to self-employment benefits will qualify for a higher interest rate than someone who fully documents all reported income. Mortgage and other financial service industries value credit score and history most when pricing mortgage interest rates.
   The sale of credit life insurance has been controversial in many cases. For example, consumers are sometimes led to believe credit life insurance is required when added to loan contracts. When a lender sells more credit life insurance than is required to pay off the loan, the cost of the premiums is inflated along with the amount of the loan, which increases the amount of interest charged and the amount the consumer has to repay. 
   "Insurers' Use of Credit Scoring for Homeowners Insurance in Ohio: A Report to the Ohio Civil Rights Commission", from Birny Birnbaum, Center for Economic Justice. Birny Birnbaum, Consulting Economist, argues that insurance credit scoring is inherently unfair to consumers and violates basic risk classification principles.
   Application score is also used as a factor in deciding such things as an overdraft or credit card limit. Lenders are generally happier to extend a larger limit to higher scoring customers than to lower scoring customers, because they are more likely to pay borrowings back.
  
  Alongside scorecards lie "policy rules" which apply regulatory requirements (such as making sure there is no lending to under 18s) and other lending policy (such as many lenders will not lend to customers who have a CCJ registered against them).
   However, based on historical information from Bloomberg, the cost to insure U.S. debts against default had risen from an average of around 25 basis points in 2007 to a range from 55 to 75 basis points in 2011. A higher cost of insurance is typically associated with increased risk of default.
  
  Section::::2012.
   To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance, or seek security over some assets of the borrower or a guarantee from a third party. The lender can also take out insurance against the risk or on-sell the debt to another company. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.
  