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How important is my credit score to an auto insurance company?

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Things to Remember...
  • Credit scores play a major role; some auto firms consider it a risk factor
  • There are three main credit bureaus in the U.S. where you and auto insurance companies can find your credit score
  • Typically, a score of below 650 is considered poor, although a poor score doesn’t mean you cannot get auto insurance
  • A good credit score tells an auto insurance company that you are reliable, trustworthy, and not a risk
  • There are several factors that you can work on to make your credit score better and get you lower premiums

Contrary to common belief, a driving record is not the most important factor when calculating auto insurance rates. Lenders will look at your credit report to determine the level of risk.

Studies done on auto insurance firms indicate that over 90 percent of all auto insurance companies use a scoring system known as “insurance risk score.” 

Credit scores play a major role in premium calculation; in fact, some auto firms have been known to adjust rates based on risk scores.

Insurance companies use an insurance risk score system to determine premium rates. Basically, the risk score system is an underwriting tool.

Like most other businesses, insurance companies are profit-driven, and they must assess the level of risk before approving your auto insurance policy application. Other measures used include:

  • Bankruptcy filing
  • Number of open accounts
  • Credit history
  • Promptness in honoring payments

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Where can you check your scores?

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Whenever one applies for auto coverage, the insurer will check your credit report in line with FCRA regulations. The insurer will use this information to calculate auto insurance risk score.

It is crucial for individuals to be aware of their scores.

There are three major credit bureaus in the U.S.; they are also referred to as credit reporting agencies.

These agencies make auto insurance and your credit score easier to manage. The three top agencies are:

  • Equifax
  • Trans Union
  • Experian

It is important to remember that each of these bureaus is independent, and they are competitors. There are cases when there are variances between the reports of the three agencies.

If you find a variation, ensure that you inform the credit bureau for correction. Remember that you are entitled to a yearly credit report as per the Fair Credit Reporting Act.

Luckily for you, there are numerous sites that give you the option to check your credit reports for free. In short, you have no excuse for not knowing your score.

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Implications of Credit Scores

Numerous studies indicate that there is a strong correlation between credit history and the likelihood of filing claims.

Generally, having a good credit score is evidence that you are trustworthy and responsible.

This responsible nature usually means that the person applying for auto insurance is cautious and less likely to drive recklessly and be involved in an accident.

People with low scores are seen to be under stress and more likely to indulge in risky behavior. Of course, there are those who argue that the two are not correlated, but the reality is that your credit impacts your auto insurance rates.

There are exceptions, and having a poor score does not exactly make you a risk taker. These exceptions are why the use of credit scores is a controversial and debatable issue to date.

Is there leeway?

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Numerous auto insurance companies have designed policies that target a particular class of people.

Typically, a score of below 650 is considered poor, although a poor score does not mean you cannot get auto insurance.

When shopping for insurance, it is essential to use comparison sites regardless of your score. A comparison website gives you a chance to compare quotes from different providers, ensuring you get the best rates in the market.

The following are factors that influence your risk score and can be used to help build your credit report.

  • Payment History – It is important to have a consistent record showing on-time payments dating back several years. Paying on time demonstrates that you are a responsible driver and increases your score
  • Debts – This factor is the number of accounts that an individual has. It is advisable to maintain very few credit accounts and ensure that they have small balances. Maintaining a very low debt helps to instill confidence in the insurance provider
  • Credit History Length – An auto insurance firm will look at how long an individual has had credit. Generally, longer periods indicate a higher likelihood to honor payments
  • New Accounts – Opening numerous accounts before applying for an auto loan will negatively affect your risk score. To help your case, you need to limit applications for new credit accounts
  • Balance of Accounts – To be on the safe side, you should strive to ensure that you do not have more than six accounts open and not have more than two unsettled loans. Negative records coupled with collections, bankruptcy filings, and judgments are bound to harm your insurance score

If your credit report has had a negative impact on your insurance score, working on the above factors will help boost it. Once you have achieved a score of above 650, you can negotiate for better rates or move to a better insurer.

To get the most current rates, you can take advantage of comparison sites which offer comparative quotes from various auto insurance providers.

Check to ensure that the site is independent and not affiliated with any auto firm. It is best to go for reputable sites which have positive reviews from customers who have previously relied on this information.

A low score should not hinder your chances of credit auto insurance; there are firms that still offer auto insurance regardless of your score. It is important to conduct an extensive research preferably online in order to locate such providers.

Beware of providers who may want to exploit your credit situation by offering high quotes. Do not settle for high premiums and always look for a way to build your score in order to enjoy better credit facilities in future.

Our FREE auto insurance comparison tool can you give you great auto insurance rate quotes from quality providers. Enter your ZIP code below to begin comparison shopping!

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