Car Insurance Rates: How Credit Score Affect it?

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Your credit score is a tool to assess how fiscally responsible you are and the type of financial risk you may pose if a company/institution provides you a service, lends you money or otherwise trusts you in any way. Being aware of your credit score is the first step if you want to learn how to lower your credit scores.

Therefore, your credit score plays a crucial role in determining your rates for insurance policies as well. In certain ways, insurance is akin to a line of credit and your credit score indicates how well you manage your different lines of credit.

By maintaining a good credit score, you open up possibilities to save in all types of insurance. Car insurance is no different. When you apply for car insurance, the insurance company scrutinises your credit history and driving record before computing your motor insurance premiums.

Your credit score is one of the major determinants of your capacity to pay for your insurance premiums. If your car insurance rate is high and you wish to lower it, improving your credit score could be the key.

Credit-based insurance score

Your credit score is a figure between 300 and 850, representing your risk factor as a borrower. If you have unpaid credit card bills, tax liens, debt collections, or bankruptcies, your score will plummet.

Car insurance companies consider a score called credit-based insurance score while calculating policy premiums. Similar to your credit score, this is rooted in your history of timely bill payments and maintaining accounts in good standing, along with any debts you may have. However, insurers do not consider personal information like job history, income, etc.

The connection between credit scores and car insurance rates

Research shows that for several years now, car insurance companies are using credit scores to determine premium rates. Are car insurance rates based on credit score? A statistical correlation is found to exist between your credit score and the likelihood of you filing a claim.

Insurers use this correlation as the reason to up the rates for drivers with bad credit. This is because if a person's credit score is low, the losses borne by the insurance company for that person are higher. Among other things, insurance companies also look at one’s credit score to understand how reliable the person is with respect to timely premium payments. With a high score, the severity of the risk you pose to the insurance company reduces – therefore, higher your score, lower your resulting premiums will be.

Before quoting, the insurance company will run a check on your credit score to also see where it stands at that particular point in time. If you have recently improved your credit score, you may be able to get cheaper insurance rates.

How to keep your car insurance rates low

Apart from doing your best to avoid car accidents and other violations, pay special attention to your credit score. Different car insurance companies use different criteria - while some companies only accept clients with a high credit score and clean driving record, others are slightly more lenient. Either way, a higher credit score plays a major role in lowering your car insurance rates.

If you do want to bear a high car insurance premium due to a low credit score, it is better to be responsible in your debt management by ensuring that you:

  1. Open new accounts sparingly.
  2. Pay all bills on time, particularly credit cards and loan repayments.
  3. Do not skip any payments.
  4. Reduce the number of loans you take.
  5. Avoid getting into serious debt.
  6. Avoid debt extension to a point that a collection agency gets involved.
  7. Keep credit cards/balances manageable/low. Using them within manageable limits and paying your monthly bills on time and in full can build a strong credit score

Regardless of your financial situation or credit score, check your credit score regularly so you are not taken by surprise when a car insurance company uses it to work out your premiums. Monitor your credit score - every year, ask for a copy of your credit report from at least three major credit agencies. If there are errors on the report, get them corrected at the earliest, because even the smallest mistake can hurt your score tremendously.

Concluding

It could take time to improve your credit score, but the benefits you can reap by having a high score is worth every effort. High credit scores could translate to lower car insurance payments and lower interest rates on loans as well.

Try your best to understand how credit scores have a bearing on auto insurance rates. Before asking for a car insurance or car insurance renewal quote, bear in mind that different car insurance companies will treat your credit score differently. If you have a solid credit record and a resultant strong credit score, seek a company that will discount your car insurance rates accordingly. If your credit record is not so good, you may want to compare multiple car insurance quotes and find a car insurance company that places less importance on credit scores.

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