Does credit score affect car insurance rates? In certain states, the answer is yes, so it’s important to maintain a good credit score in order to obtain the best prices.
How Does Credit Score Affect Your Car Insurance Premiums?
If you’ve ever applied for a credit card, gotten a mortgage for your home, or leased a vehicle, you might know that credit scores play a factor. Did you know that they can also affect your premiums the same way that other personal information, such as your marital status and driving record can?
You might already know that in all states except for New Hampshire, the law dictates that you need auto insurance. You might also know that your credit score plays a role in what type of loan and credit cards you can obtain. But do you know the correlation between car insurance and credit scores?
Credit-based insurance scores aren’t the same as the credit scores you’re probably familiar with. These credit scores are the ones creditors use, and the scores attempt to predict the chances that you’ll be 90 days past due on a payment within the next 24 months. Credit-based insurance scores predict the chances that you will file insurance claims that will cost the insurer more money than it collects through premiums.
However, according to the Insurance Information Institute, these scores don’t factor in other types of personal information such as your income, gender, or job. Instead, insurers use information such as your total debt and payment history to determine your risk level.
If you have a higher credit-based score, no claims filed, and stellar driving history, you usually qualify for lower rates. Keep in mind that the score is just one factor used to determine your premium, so if you have a spotty driving history, you might be considered a riskier driver.
According to Allstate, research shows that these scores can predict accident potential rather accurately. Those with a low score are more likely to file a claim, while those with a higher score cost insurers less since they get into fewer accidents.
According to the National Association of Insurance Commissioners (NAIC), 95 percent of insurers look at credit reports when it’s allowed, but in certain instances, your credit won’t be used to calculate your premium. Residents of California, Hawaii, and Massachusetts have laws that prevent the use of credit scores in determining insurance costs because legislation believes this causes a disadvantage for low-income drivers.
How Often Can You Request Credit Inquiries?
If you’re curious about your credit score, the Fair Credit Reporting Act lets you get a free copy of your credit report every 12 months. The Federal Trade Commission (FTC) recommends you get reports from Experian, Equifax, and TransUnion annually.
It’s important to note that when you see something alarming on your credit report, it doesn’t necessarily mean that identity theft is involved. When shopping for a mortgage or car loan, lenders usually send your information to more than one business to find the best terms. If you’re unsure why your report was requested, contact the business directly.
However, if you see an inquiry from a company you don’t recognize or if you’re not trying to obtain a major loan, it might signal a sign of credit fraud. If you believe you’re a victim of identity theft, follow these steps:
- Place a fraud alert on your report. Reach out to one of the three credit bureaus and place a fraud alert. This lasts 90 days and is free. The one bureau will alert the other two, and when a business or lender looks at your credit, they have to take additional steps to verify your identity.
- Contact businesses affiliated with suspicious inquiries. Ask for receipts and maintain a record of any communication you have with these companies.
- Send an identity theft affidavit to the FTC. Use this affidavit to file a police report and keep a copy. These documents can help fix the situation if debt collectors start contacting you.
What Other Factors Affect Your Insurance Rates?
Even if insurers use a credit-based insurance score to calculate rates, they take other factors into consideration. Some of these include the following:
- Your driving history
- Your location
- Personal information such as age, marital status, and gender
- Your vehicle
- Type of coverage you want
Your driving history plays a key role in costs, especially if you have violations or accidents on your record. Although having a single speeding ticket might not cause your rates to jump, a DUI is more serious.
They might also factor in potential discounts, such as a pay-per-mile policy or usage-based policy. Companies such as Root Insurance offer an app or installed device that tracks your driving behavior to determine your eligibility and costs.
How Can You Improve Your Credit Score?
Although credit-based insurance and credit scores are different, they consider similar behavior. For instance, if you have a high credit score, your credit-based insurance score is likely also high. As a result, if your score is low, you can take action to improve it so your credit-based insurance increases. A few steps you can take include the following:
- Pay your bills on time each month
- Bring your account current if you miss a payment
- Pay down credit card debt
- Check your credit report annually
Not only can you improve your credit, but you can also reduce auto insurance costs by looking for discounts through insurers directly. You might qualify for a good driving discount as well as multi-vehicle or multi-policy discounts if you have several vehicles or policies from the same company.
You might also lower your prices by raising your deductibles or opting for lower coverage limits. If you own an older vehicle, you might opt for liability coverage instead of comprehensive and collision coverage.
Everyone has a fluctuating credit score throughout their lifetime, so if you signed up for insurance when your score was poor and have made improvements pertaining to your financial situation, consider shopping around for a better rate. It’s best to shop for insurance every six months to one year, especially since some insurers base their rates on different metrics.
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