Why would an insurance company pull my credit report? I pay the premium upfront and in cash.
To understand the credit report question, you have to understand that insurance companies are like giant baskets. Their policyholders pay money into the basket. Then, insurance companies pay claims from the money that's in the basket to those who need it. The amount you must contribute to the basket depends on how much insurance you want and how you're categorized as an insurance customer. The secret to lower rates is to be part of a group that has a lower probability of filing a claim.
Take auto insurance, for example. If you are a single man age 24, your insurance rates are high because you're in the under-25 age group, which has a lot more accidents. The day you turn 25, voila -- like magic -- your auto insurance rates drop 50 percent! You know you're the same driver you were yesterday. So why the big rate decrease? It's because you changed groups. The 25-to-29 age group has about half the accidents of the group under age 25.
What about tickets and accidents? People assume that when they have an at-fault accident and their rates increase 40 percent, the insurance company is trying to punish them or get its money back. That's not the case at all. When you have an at-fault accident, you change groups, from those with a flawless driving record to the group with one at-fault accident. The facts say that the drivers in the one-accident group have 40 percent more crashes than the drivers in the accident-free group. Thus, the 40 percent rate increase.
Other car insurance examples: When you move from the city to the suburbs, you will notice that your rates have gone down 15 percent. When you get a job where you have to use your car for business, your rates go up by 15 percent to 25 percent. Again, it's nothing to do with you personally. You've simply changed groups.
In the last few years, insurance companies have discovered that people with excellent credit have considerably fewer claims than those with poor credit. Discounts on pricing for those with high credit scores can be as much as 50 percent or more, depending on the insurance company. Why such significant discounts? It's because the facts support it.
If your credit is not very good, you need to work to improve your credit report -- and you can shop around for your insurance. Insurance companies vary significantly on the amount of weight they are willing to give a credit score, high or low. Your goal is to find a company that doesn't put a lot of stock in credit scores.
Hope this helps. Best of luck to you.
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