What would you think if you found out that regardless of a squeaky clean driving record, a bad credit score could cause you to pay more for car insurance each year? It might sound crazy, but it’s true. Insurance providers quote you a price based upon your level of risk, but that risk isn’t necessarily limited to your driving safety. While insurance companies often advertise affordable rates and great discounts, the findings in the underwriting process could mean a much more expensive outcome for many unsuspecting motorists. Keep reading to find out more about how bad credit could be costing you money on your auto insurance.
What Does a Credit Score Have to Do With Insurance?
Insurance providers spend a great deal of effort determining the level of risk it would take to insure a customer; this protects them from excessive losses as a result of insuring risky motorists. So while you may not understand how your financial status has anything to do with your safety as a driver, insurers believe that accounting for components of your credit history can help them determine the likelihood of your filing a claim in the future. If you’re in the market for auto insurance, it would be in your best interest to boost your credit score too.
Insurance Scores and Determining Factors
Based on information recorded on your credit reports, insurance providers create what is called a credit-based insurance score. This score is calculated using factors including your payment history, the amount of outstanding debt you have, the length of your credit history, the types of credit accounts you have, and the number of times you’ve applied for new credit. This information is then used as part of the underwriting process to determine what your insurance premiums will cost.
The Federal Trade Commission has conducted studies that concluded that individuals with lower credit-based insurance scores are more likely to file an insurance claim than those who have decent credit and higher scores. Essentially, the way you handle your credit determines how responsible you are as a consumer, and all of this information is factored in to determine your level of risk to insurance providers. Want to appear less risky to insurance providers? It might be time to focus on improving your credit.
What Can You Do?
While there are some states that do not allow credit-based insurance scores, a federal law, the Fair Credit Reporting Act, allows insurance companies with a “permissible purpose” to look at your credit history, even without your permission. Now that you know why insurance providers look at your credit history, it’s worth your time to take every step you can to improve your credit score and have a chance of lowering your auto insurance premiums.
Review Your Credit Reports
First and foremost, you will need to request a copy of your credit reports from one of the three credit bureaus. You’re permitted one free credit report from each of the three each year, so you’ll have several opportunities to watch your hard work pay off over time. Review the reports in their entirety to determine which accounts are past due, delinquent, or in collections. Any outstanding debts should be paid as soon as possible—ideally, you’ll only owe about 30% of the credit available to you at any one time.
After reviewing your credit reports you will need to ensure that everything on file is accurate. If you’ve found evidence of accounts that are inactive, amounts that aren’t correct, or accounts that have been settled but are marked as delinquent, you should file a dispute with the credit bureau. You will likely have to provide proof that the information is inaccurate for the entry to be updated.
Make Timely Payments
Once all the information on your credit report is accurate, you will need to develop a plan of action that will allow you to pay your bills in a timely fashion. Whether you set up your payments for automatic deductions or set reminders on your smartphone calendar, you need to ensure that payments are consistently made on time.
By following the above advice for improving your credit score, you will soon start to see a change in your score. Remember, it takes time for your credit score to improve. Keep following these tips for a period of at least three to six months—once your credit score improves you’ll be able to find auto insurance with less expensive premiums.