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Credit Scores Matter When It Comes to Car Insurance

July 1, 2016
Credit Score, Personal Finance
Credit Scores Matter When It Comes to Car Insurance
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You might expect to have your credit score pulled when obtaining new credit, but you may not realize your score can also affect your car insurance rates.

Statistically speaking, drivers in lower credit score ranges are most likely to file claims, so insurance companies are cracking down on drivers’ creditworthiness.

What are insurance companies paying attention to?

According to Esurance, many companies use a credit score specifically for insurance purposes to help determine your risk, and therefore, your rates. Those with bad credit are more likely to make insurance claims and receive payouts, so your insurance company wants to know that you can afford to pay your debt obligations in a timely manner.

While similar in calculation, general credit scores and credit-based insurance scores are used for different purposes. Credit scores are made up of payment history, credit utilization, length of credit history, types of credit in use and new credit, and are calculated based on information taken from your credit reports. Your FICO score (or its competitor, the VantageScore) is used by lenders to determine your creditworthiness and loan terms.

Credit-based insurance scores, on the other hand, don’t factor in personal information or job and income history. The factors that will likely influence your score include length of credit history, payment records, amount of debt, number of recent hard inquiries and negative accounts. The Federal Trade Commission has determined that these credit-based insurance scores are predictive of claims made, so they are used exclusively by insurance companies to determine your risk and rates.

Of course, this credit score isn’t the only relevant factor in determining rates. Your driving and claims record, along with your age, sex, location, vehicle type and other factors will also likely influence your level of risk. While your credit score is indicative of financial responsibility, your other data must also be in good shape to qualify for the lowest rates.

Will my car insurance company pull my credit?

Most of the major insurance companies will pull your credit-based insurance score. However, if you live in California, Hawaii or Massachusetts, these scores are banned, and your rates will be determined based on your driving record and other personal information alone.

According to a survey by Conning & Co., 92% of all insurance companies use credit history information to determine rates for new policies, so unless you live in a state where it’s banned, you should assume your credit-based insurance score will be pulled.

Is there anything I can do to lower my insurance rates?

There are a couple of things you could do to try to lower your auto insurance rates without changing your car or deductibles. However, there are certain circumstances you can’t change, like your age. Also, you may already be getting the best rates possible.

Polish your credit score. You can take several steps to build your credit. A good first step is to get your free annual credit reports and check them over for errors that might be lowering your score. If you find mistakes, dispute them.

Choose an affordable insurance carrier. Check here for the best car insurance options for a number of different circumstances, including best for military coverage, cheapest premiums, and best for drivers over age 50.

Provided you have a clean driving record, the higher your credit-based insurance score is, the lower your car insurance rate will be. By building your credit and maintaining a good driving record, you can keep your rates reasonable.

This article updated July 1, 2016.