Learn How Your Credit History and Scores Impact Your Rates and Finances

Learn How Your Credit History and Scores Impact Your Rates and Finances

Did you know your credit score affects your car insurance premium rates? Nearly all auto insurance carriers use credit-based insurances scores to help determine how much of a risk you might be, whether to issue you a policy, and in most cases determine the amount of premium you will pay. In fact, according to a recent survey conducted by Conning and Company, 92 percent of all insurance companies use your credit information when underwriting new policies. This credit-based score takes into account a number of details about your credit, along with your driving history, claims history, and other factors.

If you have a high credit score, an excellent driving record, and zero claims history, you will likely qualify for low rates. However, if your credit is less than stellar, you might be considered a higher risk. Why? Research has shown that credit scores can accurately predict potential for accidents. A number of researchers, including the University of Texas and the Federal Trade Commission conducted independent studies to understand the relationship between credit history and accident risk. They discovered that individuals with lower credit scores tended to incur more car insurance losses and higher payouts, thus making them riskier to insure. While it may not seem fair, the correlation between lower credit scores and those who file more claims is clear – and when auto insurance carriers end up with a bad risk, the other policyholders usually end up footing the bill.

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So what can insurance companies take into consideration when they look at your credit? Negative factors might include a short credit history, past due payments, accounts in collection, high debt to income ratio, judgments, foreclosures, bankruptcies, and even a high number of credit inquiries. Conversely, positive factors can include an established credit history, on-time payments, no accounts in collection, open accounts in good standing, and a low amount of debt. Some insurance companies do not look at your credit report, but use your Fair, Isaacs & Co. (FICO) credit score, request your ‘insurance score’ from FICO, or create their own scoring system using the FICO and insurance scores, and other underwriting criteria to come up with their own credit-based insurance number for you. This credit-based score is less concerned with you taking on more credit than it is how long (and well) you have been managing your credit. While it is easy to obtain your FICO score by ordering it from one of the three major repositories (TransUnion, Equifax, and Experian), the chances of you obtaining your insurance score is slim to none. Even if you were to obtain that score, because there is no uniform standard, like the FICO score, there really is nothing to compare it against.

So what do you need to know? First, an auto insurance customer with bad credit will pay 20 to 50 percent more in their auto insurance premiums than a consumer with good credit will pay. Second, it literally saves you money on insurance to improve your credit. A couple of general ways to improve your credit score include paying your bills on-time and not carrying high balances on your credit cards. Finally, make sure you check your credit history periodically – at least once a year. While credit reports are usually accurate, mistakes do happen and those mistakes can be costly, affecting not only your score, but your ability to get a lower auto insurance rate.

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