What does your credit have to do with the cost of your auto insurance. Read the following article from Robert Harrow.
Most drivers understand the role a clean and safe driving record plays in keeping your auto insurance rates low. What you may not know, however, is that something entirely separate from driving can increase your rates — your credit score. In recent years auto insurance companies have began using credit scores to determine yearly premiums.
This brief guide goes over how drivers are affected by this, and what they can do to lower their premiums.
“I Was Never Asked For My Credit Score”
A company will not directly ask for your credit score, which is the reason why many people may not realize it affects their rates at all. When filing out a quote, insurers will ask for your social security or driver’s license number. As your application is processed, the insurer will run your credit report based off the information you gave them and translate it into a “insurance score”. Simply put, an insurance score is how the insurance company translates your qualitative credit report into a number — much like a FICO score.
How Big of an Effect Does it Have?
We conducted a small study where we took a sample 30-year-old male driver, and obtained auto insurance quotes for him based on excellent, good, fair, bad and poor credit scores. We considered drivers in both New York City and Salt Lake City. What we found was quite staggering. In Salt Lake City, a premium was nearly twice as expensive for someone with poor credit (below 500) than someone with excellent credit (above 720). The quotes from New York followed the same pattern. Based on these findings, having a bad credit score affected our driver more than having a DUI on his record.
Can All Insurers Do This?
Mostly. Some states have laws preventing the use of insurance scores. However, not many do this. California, Hawaii and Massachusetts are the only states to currently outright ban the practice. In other states, there are varying restrictions, which allow companies to use certain parts of credit reports to determine rates.
Also, some companies only look at particular line-items on your credit report. Allstate, for example, uses factors such as “Number of 30 days Past Due Payments in the Past Year” or “The Current Amount Due” which is your outstanding balance for all open credit lines.
How Can You Improve Your Insurance Score and Lower Your Premiums?
Getting an affordable rate will be harder to do if you have poor credit. The best thing you can do is to work to improve your credit score. Paying back your current bills and squaring any debts is a great start. Make sure all your payments are made on time. Also, keep your total credit utilization low. If you consistently max out your credit cards, it will have a negative impact on your score.
Your insurer won’t know your credit score improved, unless you report it to them. They only run your report at the time of your application. If you took proactive steps to improve your credit score call your auto insurance company. Ask them to re-evaluate your report, and see if that can translate into a discount.