Why Do Car Insurance Rates Vary From Company to Company? Credit, Tiers, and More.

You've seen the commercials: You can save a lot on your car insurance. Not only that, but there are even companies that compare the car insurance rates of their competitors, even when they don't have the lowest rates themselves! The first question on your mind should be, "why do car insurance rates vary so greatly from company to company?" After all, if they're providing the exact same coverage, shouldn't they all be priced the same, or at least very closely? Is there just a difference between cheap and expensive companies, such as the customer service they provide? Or do some companies offer better rates for one driver, while offering worse rates for another driver? These are the issues we explore in this article.

The Car Insurance Tier System

Many companies determine auto insurance rates by a "tier system," in which drivers are placed in one of several tiers. Some companies have as many as 14 tiers. Others have two, or even just one (which essentially means they have no tiers). But most common is a three-tiered system in which drivers are classified as preferred, standard, or substandard. A preferred driver might fit the following profile: Insured with the same company for more than three years, during which time he's had no claims or accidents; no DMV "points" on his driver's license; full coverage with liability limits greater than those required by law; and low annual mileage. By contrast, a substandard driver would need to have only one of the following: Lapses in insurance coverage for more than 30 days; one or more at-fault accidents in the past three years; more than two other-than-collision claims, each greater than $500 in the past three years; more than six DMV points; or a DUI. Anyone not fitting into either category would be standard. Where the discrepancy in car insurance quotes comes into play is among car insurance companies that have two, four, or as many as 14 different tiers. For example, one company has six tiers, the other has 12. You have a decent driving record, but you've made some mistakes in the past three years. Company A classifies you in the fifth of six tiers, but Company B rates you in the ninth of 12. Company B is likely to offer you better rates.

Credit Agencies

Did you know that your credit rating has a direct impact on your car insurance rates? Car insurance companies use incredibly complex algorithms to determine your rates (much more than just the tiers above), and their math tells them that people with better consumer credit are better risks than people who've made bad choices in the past. The reason this can lead to varying rates among car insurance companies is that two different insurers may use different credit bureaus to determine your credit rating. You don't have one credit score; you actually have three - one each from Equifax, Experian, and TransUnion. Since these bureaus are competitors, they don't share information, and as a result, you may have incorrect information on file with one or more of them. If one car insurance company uses Equifax, for example, and another uses TransUnion, and your TransUnion credit report incorrectly records a bankruptcy in your past, you can bet that the insurance company that uses TransUnion is going to charge you higher rates!

Advertising and Marketing Expenses

Like we said at the beginning of this article - "you've seen the commercials" - and they're not put on the air for free. Some insurance companies spend a lot on marketing, and you are paying for those cute commercials with your premiums. This is not to say that bare-bones insurers are always a better deal - after all, the big companies that run the ads can take advantage of economies of scale - but it is something to consider. In fact, considering several insurance agents and agencies is your best bet. Shop around and take advantage of those varying rates to find the best value for your dollar.