Does Your Credit Score Affect Your Auto Insurance?
Your Credit Score and Auto Insurance Rates
Credit score affects virtually every aspect of financial lives including credit and loan eligibility and even the interest rates. However, many people are unaware that it can also affect the amount you will need to pay for auto insurance. Currently, most states permit insurers to utilize credit-based insurance scores while underwriting new policies.
This is just a brief look into what a credit-based insurance score is.
Insurance score is a unique type of FICO score, designed to be used by insurance-providing companies only. They are derived from data contained in your credit reports, similar to other credit scores. Insurance scores are usually from 300 to 850. In this case, the higher score will be favorable.
Hence, what insurers don’t consider is not the actual credit score. However, insurance credit scoring models consider other factors such as bill payment histories, current credit, kinds of credit used, number of new accounts recently opened, and outstanding balances on credit cards. But, it is crucial to understand that the methods employed to derive insurance scores are distinct from those used to derive credit scores.
This paper seeks to establish the impact of credit scores on auto insurance premiums.
Some aspects of the study include the fact that drivers who have a bad credit rating are known to make more claims than those with good credit ratings, and the amount that they claim is also higher. Therefore, people who have poor credit ratings are traditionally deemed as having higher insurance risks. The difference between the two can be considerable.
Some studies involving the insurance industry revealed that drivers with poor ratings can be charged almost double what excellent-rated drivers would be charged. For example:
- A risky driver with a low credit score (between 300 and 579) might cost $1,528 per year.
- A driver with good credit (score between 721 and 800) would only be paying $795 per year for similar coverage.
The actual formulas that insurance companies apply in each state are not made public. However, in most occasions, the credit score contributes 10% towards the determination of the auto insurance premium. The primary component of the rate quote is the history of driving and other risk factors.
Which States Permit Credit Score as a Factor?
All but a few states permit the use of credit scores in auto insurance underwriting to some extent. Currently, there is a credit reform in only four states: California, Hawaii, Massachusetts, and Michigan do not allow credit to be used in auto insurance rates. In those states, it is prohibited to use your credit history and therefore your credit score cannot influence the premium you end up paying.
Other states have put in place certain restrictions on the usage of credit data. In Maryland and Oregon, credit scores can be incorporated into the rating to offer a lower premium for those with good scores but cannot be used to charge higher premiums for low scores. A few other states regulate the percentage which can be applied by the credit scores on quotes.
Restoration of a Low Credit Score Reduces the Premium
The good news is that insurance scores are not fixed and can be changed. If you are currently in a situation where your credit score is not very good, it may be beneficial for you to have better scores at the time of renewal. Increasing your credit score by as little as 50-100 points can potentially save a couple of hundred dollars per year.
10 Strategies to Build Better Credit
Here are some wise financial choices to help you raise your credit score and cut insurance rates.
- One should use the following guiding ideas: Pay all of your invoices on time; delinquencies damage scores.
- Minimize the credit card and other revolving credit amounts.
- Cut the volume of credit applications; too many applications usually point to a greater default risk.
- Review any errors in your bureaus' reports to be sure.
- Maintain low credit use ratios whenever you can.
The lesson is: It is generally good to evaluate the prices of automobile insurance among many insurance providers. Still, maintaining a solid credit score is just as crucial as it will help to lower the vehicle insurance payment required. To spend less overtime, it is advisable to monitor your credit score and credit reports.
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