Why can't you use an unused credit balance as collateral for auto ins.?

My understanding is that you need $10,000 in insurance (in FL anyways) for the right to own and drive a car. I know about escrow or muni accounts (in the proper amounts) that serve this purpose of collateral, so why can’t you use a a credit balance as collateral? Surely there could be some way for the authorities to monitor to balance to make sure the margin always stays above $10k…

This way you would only make payments (in the form of interest to the cerdit card co) for insurance purposes in the event of your own screw up (which will almost never happen to many responsible drivers) in no-fault states (such as FL).

Bingo… bad drivers pay, good drivers don’t, not a penny wasted on BS unused insurance.

Ugh, the whole time I should have been saying “credit line” not “credit balance”.

A line of credit is nice to have, but it is not an asset. :rolleyes:

If you keep a $10,000 line available on a CC, you won’t be making any payments on it for interest. The line is $10,000, but the balance is 0. In the event you have an accident, that’s when you’ll use the line and start paying it off. When this happens, you better get another $10,000 line set up. Also keep in mind that you’ll be on the hook for anything beyond $10,000 in damages, and that won’t go very far with the price of cars these days.

I’d rather just stick to paying ~$500 a year and having $50,000 in coverage. (Just liability coverage with no comprehensive on my old vehicle)

Beyond that, a CC line is extremely liqud and easily spent and can’t be considered as escrow unless you take a $10,000 advance on the card and put it into an escrow account.

Yes, the “authorities” could monitor accounts to ensure they stay at the right available line, but that would be a huge undertaking for the state and I can’t see anyone wanting to be bothered with such a chore.

knitz: Good job pointing out the obvious… there is a special place in my heart for members like you. :stuck_out_tongue:

gotpasswords: Thanks for your reply, but I did not ask whether I should do it or not, I was asking for information. Remember, we are not talking about whether one should do minimum coverage or not, we are trying to talk about meeting the requirements for financial responsibilty for auto insurance.

Maybe instead of asking “Why can’t…?”, I should have said “Can I…?” Then it would have sounded less like asking for advice and more like an informational inquiry, sorry.

I submitted an e-mail to the bureau of financial resonsibility, they’ll get back to me in 2 business days, so I’ll post the outcome then.

Let’s not forget that you could use a $50,000 credit line for this also… then it wouldn’t be so minimum. Or you could use a 20k to reduce your payments significantly… sort of like having a $20,000 deductible… sounds pretty cheap huh?!

To me the reason is quite clear:

While you may have a $10,000 line of credit today, there’s no way to prove that you won’t run out and buy a bunch of stuff tomorrow, using up that line of credit.

With insurance you pay in advance, so the government KNOWS you’re covered for a particular period. With escrow, similarly, you have to leave the money on deposit for a specified period. But a line of credit can vanish in an instant.

Ed

So, a credit line controlled via escrow is that outlandish to you?

Why shoulf The Gubmint have to monitor something that is YOUR responsibility to maintain? To ensure your compliance the account would have to be reviewed at least daily…or maybe coded to reject transactions not approved by the department that was created to monitor this system. This department would be funded by tax-dollars which you & I would have to pay (UNNECESSARY BURDEN ON THE TAXPAYERS TO ENFORCE A COMPULSORY LAW).

and…

There is no guarantee that your credit worthiness will be able to allow a $10,000 line of credit. You may be an “A” credit risk today when you set up the reserve, but what happens if ><insert circumstances here>< and your credit takes a dive? Should a financial institution be forced to maintain a line of credit for which you are now ill-able to pay? One that you could bankrupt? No. They should not. And what if the credit company fails & takes your account with it? (UNPREDICTABLE READINESS OF FUNDS TO THE VICTIMS)

and…

What happens if/when you have multiple big losses? People who study this junk (actuaries mostly) know that one of the best indicators of someone’s potential to cause a nasty accident is if they have done so in the past. In the insurance world at worst you end up in the expensive assigned risk pool–someone HAS to cover you. In the credit world, you have to give up the car if your credit can not support another $10,000. (NOT A GOOD DEAL FOR YOU)

and…

Suppose you end up going bankrupt? The Credit company will suffer and will have to pass that loss along to other interest-payers. Make the settlement immune to bankruptcy? Can’t bleed a turnip: you still may never have to pay the money back, meaning you get to walk away from all the trouble you’ve caused. An insurance company will at least have collected enough money (from you and other policyholders) to cover your mischief (NO GUARANTEE OF YOUR ACCOUNTABILITY)

and…

WHY in the world would you commit to paying $10,000 (at a minimum, remember, you’re going to be paying revolving/usurous interest charges on top of this, so let’s just call t $30,000+ in the end) if you injure someone, and let’s hope that’s as far as the damages go, when it would take easily 10-20 years of insurance premiums to equal that amount? And don’t forget, that $10,000 benefit comes complete with attorney representation if needed if you use an insurance company.

The simple answer: They are called “accidents” for a reason. Insurance companies do not pay for damage you cause intentionally, SO…

Insurance is a method of sharing a financial burden. Since driving a car puts us at risk of causing an accident we are al at risk of a significant financial loss. Since to whom the loss will fall is unpredictable (mitigatable, yes, but there are no guarantees that you won’t have an “accident”) insureds assume a share of the potential loss—this is the fundamental principle behind insurance.

If you don’t buy into the insurance thing because you feel you are impervious to fate, you can look into getting self-insured, but I think that would involve your putting the $10k CASH into an escrow account.
Bottom line: The money has to be available, and not put at risk by turns in your credit worthiness. Even insurance companies’ policy obligations are “insured/guaranteed” by a government fund just in case the company becomes insolvent. There is no similar promise for your line of credit.

If you self-insured via credit card, and ever get into a serious accident, even if it’s not your fault, you’re going to wish you’d never thought of that idea:

I presume that you don’t have $10K cash lying around unused, or else you’d be putting it in an interest-bearing escrow account and self-insuring (which you CAN do with specific stipulations). Remember, cash is an asset, credit is just a potential debt – and a transient offer, terminable at will.

Please keep in mind that it’d be profoundly foolish to settle a serious medical claim hastily. A wise attorney will often suggest you wait at least until 6-12 months, so the full extent of the injuries, and associated treatment and rehab are better known. Once you accept a settlement, the book is closed, even if you turn out to need another operation or therapy. If you ‘need the money now’ to get by, you can be sure the opposing insurance company will use that to indercut your settlement (“We can only offer you $10K today. We only reimburse for solidly documented past or future expenses”]

  1. Your car may be totaled or seriously damaged.[ul]
    [li] How will you get to work?[/li][li] How will you pay off the balance of your car loan (if any) on the totaled car?[/li][li] How will you pay for a replacement or repairs?[/li][li] How will you pay for a rental while it’s repaired?[/ul][/li]Total costs can easily exceed the “extra $10K” you don’t have lying around.
    After a bad accident, you may be financially strained, even with insurance.

  2. You may be injured and unable to work. There goes your income. [ul]
    [li] What will you live on? [/li][li] Will you even have a job, if you don’t show up for a few mionths?[/li][li] Who will pay you medical bills (Most HMOs won’t. They expect insurance to][/li][li] Who will manage your affairs, debts and and bills if you’re incapacitated?[/li]Your wife? Parents? Kids? Shall we have the government monitor THEM too?
    What if they leave you, get sick, or die? What if they simply refuse the burden?

    [li] What happens to your credit line, now that you’re less able to pay?[/li]No job, no car, lots of medical bills, no insurance - what a prime borrower!
    [/ul] Medical crises are the #1 cause of bankruptcy. Auto accidents are a leading cause of expensive medical crises.

  3. Your assets are already on the line for all damages in excess of your insurance coverage. In a serious at-fault accident, the other party has a claim against all your property and future earnings ANYWAY. Insurance increases the amount available to someone you accidentally injure. “Credit card collateral” does not. The government wants to assure that all its residents are protected against harm (accidental or intentional) by other residents.

This is why many states make it hard (or expensive) to qualify as a self-insurer. They want to keep people from using this method to save a few bucks at the potential expense of their fellow drivers. Self-insurers are usually substantial companies, well able to set aside or bear the full cost of several major accidents.

Imagine the other party is at fault (and dies). Say they have a poor driving record and high premiums, so it was cost-effective for them to use their liquid assets to self-insure, knowing that even if they bought a minmum policy, the leftover liability of a serious accident would wipe out those liquid assets anyway. Self-insuring would be a “no lose” scenario for them, but you would be only be able to collect $10K in collateral vs. $10K in insurance + $10K in assets. Would you feel the government has protected your interests adequately? Or would you call it a scam?

As Matchka said: they’re called “accidents” for a reason. No one is immune or infallible. You may think you’ll never be at fault, but statistically, you will. [In fact, the last time I was judged at fault in an accident, over 20 years ago, was just a week after I complained that I’d never need all this coverage. I never needed it before, and I’ve never needed it since, but I needed it then. True, I’ve spent far more in premiums than that accident cost me, but it could have wrecked my life at the time, if I hadn’t had insurance. I wouldn’t have been able to complete my doctorate, I might have had to declare bankruptcy, and my lifetime earnings would’ve been far less

Shoot. There’s your answer. If you die your account wil be closed. Whose line of credit is going to pay my damages NOW? :smack:

What an enormous amount of barely relevant waffle. This is GQ not “lets give the OP a lecture on life skills”.

The question is very simple. Why can’t you use a line of credit as a guarantee of your ability to pay in the event of a car accident, instead of insurance, so that you only pay when you crash (hopefully never if you are a good driver)?

Answer: Firstly, (and this aspect has already been partly covered) any ordinary line of credit could vanish. The offeror of the credit could withdraw it at any time or you could spend it at any time. So it needs to be a special line of credit that you cannot spend and the financier cannot withdraw.

Secondly, the line of credit needs to be in favour not of you but of third parties in MVA’s. Otherwise, if you die or go bankrupt or simply choose not to call on it, third parties are left hanging.

So, OK, none of that is impossible, why is it not done?

For the answer to that, you need to consider why financiers offer lines of credit. Answer: either for a fee (Amex style) or in the hope that you will spend the credit, at which point they get the opportunity to charge interest or for both reasons. And of course the financier expects to get their principal back. But of course in under this scheme you will only spend the credit if you crash. At which point firstly you will have suffered a financial loss and may no longer be creditworthy (up to and including bankruptcy) and secondly you may be dead.

So the financier cannot be sure you will or will be able to pay them either interest or principal. In short this schem will very likely be a very poor credit risk. What is a theoretical financier going to do about that? One or both of two things: charge very high fees to cover the risk or require security over valuable property.

So keeping this line of credit open is going to cost you, either directly or by tying up valuable assets, it is not going to be free. And given that an insurance policy not only serves the same purpose but also covers the actual costs incurred up to the limit of the policy, I think you would find that the “special line of credit” scheme would suddenly start to look quite expensive in comparison.

And January’s “Rehash-the-answers-and-call-it-my-own” award goes to: >>rips open the envelope, quivering with excitement<< Princhester

Thank you, Gotpasswords for “a CC line is extremely liqud and easily spent…unless you take a $10,000 advance on the card and put it into an escrow account.” with an assist by Matchka “the account would have to be…coded to reject transactions not approved by the department that was created to monitor this system…Should a financial institution be forced to maintain a line of credit…No.”

Sounds a bit like MatchkaThe money has to be available, and not put at risk by turns in your credit worthiness" and “(UNPREDICTABLE READINESS OF FUNDS TO THE VICTIMS)” and KP “Imagine the other party is at fault (and dies).” with the follow up clarification.

(Followed by Lecture on Life Skills 205, “Why Banks Hate Empty Lines of Credit”) followed up by an insightful reflection of credit worthiness, BK and how the banks will finance such a “schem”…all of which had already been opened up.

Dude, sorry you didn’t get the post before the answers showed up :smack: but lose the attitude (I refer to “an enormous amount of barely relevant waffle”) about the long-winded but clear responses to a question that is more complex than the OP probably realized.

First things first I always say… figure out the options, then make decisions. Figure out if I can do this, then decide if it is in my best interest to do this, either now or much later in my life when I may be in a position to reconsider the option.

I am still on the options part, people, that’s why I am in GQ. But, some of you have helped me tremendously.

First off, it’s not that hard for an escrow company to monitor my credit and close the account once my credit goes bad, in the event. It’s also not that hard to offer a service in which I (and my insurance co.) am notified in the event that the credit co. withdraws their line. Then, just like everyone else, you gotta go get normal insurance pronto. Not a problem.

But, the fact that Princhester pointed out about the the creditors side is why this idea would never be. Thank you for eliminating this potential option for me. I should have known that the whole thing was illogical from their POV, having a Finance degree and all… but I must not have thought this through enough.

I thought of this last night, and it was said here too: The legal representation that one receives from insurance companies might not be available in this scenario because you are not really paying them for it with premiums… this is a reason why it would not be in my best interest to do this, even if it was a legitimate idea in the first place.

Then just getting minimum coverage is pretty risky too, of course.

Thanks for your help.

Cheauvan,

I know some people had hit some elements of an answer. I even acknowledged that, although you carefully avoided quoting that bit. Many of the preceding posts almost had the right answer but not fully. Some of what I said was a bit like what some of what other posters said. Jam is a bit like honey but is not an answer to “what food do we get from bees”.

You will note that the OP has acknowledged that the preceding posts missed the key point, and has thanked me for pointing that out.