auto insuranceYou might expect a plunging credit score to affect your ability to qualify for a car loan or how high the interest rate on your credit card will soar. But too often Americans don't realize a plunging credit score can cost them big bucks on insurance premiums.

One of the biggest mistakes insurers say people make is not realizing when their credit score is tanking.

"Credit scores factor heavily into your rate," says Ashley M. Hunter, a construction-risk insurance specialist who owns HM Risk Group in Austin, Texas. That's because in the eyes of your insurer, if you've missed a few payments to your credit card company or have written a lot of bad checks (that wound up in collection), chances are you'll do the same thing to them.

So, they charge you more money to protect themselves. Kind of like the insurer taking out an insurance policy that they'll get paid for the insurance plan they're selling you.

Hunter says people with poor credit are also more likely to file a claim. And that financially stable people have been shown to have fewer traffic violations or accidents than those who are financially stressed. "So you're charged high premiums in anticipation of the violations, accidents, or claims you'll have in the future," Hunter says.

Criticizing the use of credit scores
Many are speaking out against the use of credit scores in the insurance premium scoring game, claiming insurers are unfairly using credit scores. And, in many cases not notifying consumers that their credit is coming into play when determining premiums.

Eric Poe, chief executive officer for CURE Auto Insurance, a not-for-profit reciprocal exchange based in Princeton, N.J., that fights for fair insurance practices, says a credit score is just one of eight factors used to determine rates.

"Age, how long you've been licensed, gender, where you live, how you use your car (how many miles you drive to work or annual mileage), the car's cost, and your driving record used to be the seven things that determined rates," he says. "Unfortunately in the past decade, the largest auto insurance companies have introduced many income proxies such as credit score, your highest level of education completed, and your occupation to determine whether you are eligible to receive the lowest rates."

Poe says even if a driving record is spotless, a less than perfect credit score could lead to excessively high premiums.

"It's unfair," says Joe Goodwin. When Goodwin's job became a victim of the recession, his credit score dropped nearly 100 points. "I got behind on bills for the first time in my life." When renewal time rolled around on his home and auto insurance policies, Goodwin says his premiums jumped 27%. "I had never filed a claim and was a 20-plus year customer."

Goodwin says when he asked his insurance agent what prompted the spike in rates, he was stonewalled. "I got the runaround. It wasn't until I started shopping around and learned [from agents] that my credit score is factored into premiums that I connected the dots and realized I was being punished for my credit dropping."

What's a poor credit score to do?
Poe suggests asking a lot of questions when obtaining rate quotes and before renewing any policies. "Due to the fact that all insurance companies use the seven general factors to determine rates, it is important that drivers ask an auto insurer if they use any income proxy rating factors, as this can determine how much they pay significantly," he said.

If your agent can't give you a straight answer as to whether or not your credit will affect your rate, tell him "thanks, but no thanks," since there's a pretty good chance it will.

"Studies have shown that your credit score, education and occupation can increase rates within the same auto insurance company by as much as 200%," says Poe.

There is some encouraging news: Although they might not have a reptile as a pitchman, Poe says there are "fair" insurers who value a person's driving record and years as a customer more than their FICO score. "Customers might have to spend a few extra minutes to find them," he says.

Gina Roberts-Grey is a regular contributor to WalletPop.com

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