Credit score

Here’s why insurers care about your credit score

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Is Your Credit Score Costing You Money?

Insurers consider a variety of factors when setting auto insurance premiums, including a motorist’s driving history, address, vehicle make and model, and surprisingly, credit rating. At first glance, your credit score may seem unrelated to your ability to drive safely, but the statistics tell a different story.

What does your credit score say about your driving habits?

Insurers consider credit scores as a measure of a driver’s liability. The indication is that those with high credit scores manage their money well and are more likely to behave more responsibly while driving. Likewise, those with lower credit scores might be less responsible drivers, which could lead to them having more accidents.

There is supporting data, including an independent study conducted by the Federal Trade Commission (FTC). It found that drivers with bad credit were more likely to file auto insurance claims than drivers with better credit scores. There are always outliers, but that’s the general trend.

Insurance companies aim to minimize risk to themselves, so they take into account just about anything that can be considered a reliable indicator of risk, including credit scores. Bad credit raises the average annual auto insurance premium from $2,646 to $3,622, an increase of nearly $1,000. But this varies widely by state and insurer.

A handful of states, including California, Hawaii and Massachusetts, have banned insurers from evaluating credit when setting insurance premiums. So drivers who live in one of these states won’t have to worry about poor credit raising their rates. But if a driver lives elsewhere, the boost in their credit rating could save them a lot of money on insurance.

How to boost your credit

To increase your credit score, you need to take consistent action over a long period of time. Try doing the following:

  • Pay all your bills on time.
  • Avoid using more than 30% of your credit limit on your credit cards each month.
  • Pay off any credit card debt you have.
  • Avoid asking for new credit frequently.
  • Don’t close more than one credit card every six months.

You can also consider getting a secured credit card to help you build credit. These cards rarely offer rewards and tend to have low credit limits. Some also charge an annual fee. But card issuers will accept applicants with poor credit and report payments to the credit bureaus. As long as you pay on time, it could improve your credit score, but it’s important to keep your expectations in check.

It is not possible to increase your credit score overnight. Even if you do everything right, it will likely take months or even years to see a significant difference in your credit score. But that doesn’t mean you have to settle for exorbitant car insurance premiums during this time.

Some insurers penalize customers more than others for poor credit. Shopping around for car insurance can help you determine which company can offer you the best rate.

Drivers interested in proving their safe driving habits to insurers can also consider enrolling in one of the driver monitoring programs offered by a growing number of auto insurers. These usually require a driver to install a small device in their vehicle. It monitors their driving habits and reports to the insurer. Many companies give drivers who sign up for these programs a discount just for doing so.

It’s also worth researching a new insurance provider each term of the policy to see if you qualify for a better rate elsewhere. If you’re serious about improving your credit and don’t have to file auto insurance claims, you should see steady progress over time.

Make sure you choose the right auto insurance coverage

Car insurance is something most people don’t think about very often. Although there are many factors that lead people to change car insurance companies, it is important to educate yourself to ensure you choose the right coverage for you. The right coverage means not paying for coverage you don’t need and not giving up coverage that is right for you. Although price is a major factor, we also consider other factors such as customer service and the claims process when choosing what we believe are the best auto insurance providers.