Although you may have avoided auto accidents and moving violations, you may still be paying a higher car insurance rate if you have not managed your credit score. In fact, did you know that your credit score is actually one of the biggest factors insurance companies use to determine your auto insurance premium?
How Does My Credit Score Affect My Auto Insurance Rate?
Considering that your credit score does not appear to directly relate to your driving habits, it may be difficult at first to understand why it represents a determining factor in your car insurance premium. However, it may make more sense knowing that insurance companies classify people into groups in order to develop fair insurance rates. Although insurance companies cannot predict when an individual will be involved in an accident/claim, depending on the size of the group, these companies can predict, with relative accuracy, the number of losses in a specific group, along with the cost of these losses. Although every insurance company is different, these groups are typically assembled based on criteria such as age, gender, geographic location, violations, accidents, past claims, and credit history.
You Belong to a Group
Now that you understand how insurance companies classify consumers into groups, you likely realize that when you apply for auto insurance coverage, you are placed into one of these groups. When it comes to determining which group you belong to, actuarial research has shown that:
- Drivers with two moving violations in the past three years have a greater chance of being involved in an auto accident than drivers with clean records. Therefore, if you fall into the group with violations, you can expect to pay more for your car insurance than those in the violation-free group.
- The ways you have used (or abused) your credit in the past will place you in a group with a similar credit history, and your insurance rate will be influenced by the rating factor applied to this group.
- Younger drivers are involved in more auto accidents, and females have proven to be safer drivers than males, so your age and gender also play a role in determining the group into which you are classified.
Is it Fair to Use Credit Scores to Determine Car Insurance Rates?
Some people believe that using credit scores to help determine insurance premiums is not fair, but studies show that this practice is actually beneficial to consumers. In fact, according to insurance industry data, more than half of policyholders enjoy lower premiums because their solid credit scores qualify them for discounts. On the other hand, drivers with the lowest credit scores can typically expect to pay 40 percent more for auto insurance.
Credit Score Use Varies from One Insurance Company to Another
Every insurance company is different, and the score that insurers develop is not the same as the credit score lenders use. These insurers also weigh credit scores differently depending on their target market, which can explain why one insurance company may reject your auto insurance application while another company accepts it. For instance, some companies may only accept drivers with the best credit scores and no violations, while other companies may accept drivers with less than perfect credit scores and driving records.
How to Improve Your Credit Score
If this post has you wondering how you can improve your credit score, there are several steps you can take. First, you must acquire your credit score, either online or by phone, which you are entitled to every year at no cost from each of the three major credit reporting agencies. Once you’ve received your credit score, here are some steps you can take to improve it:
- Do you see any errors on your credit report? If so, be sure to have them removed.
- Always pay your bills on time. If you have trouble remember to pay them on time, consider enrolling in automatic bill pay programs for your routine expenses.
- If you have debt, be aware of the total amount and always keep your credit card balances lower than half of your total credit limit.
- The length of your credit history matters, so keep this in mind when you’re thinking about closing accounts.
It may take years to improve your credit score, but it is well worth the time and effort. Not only will you save money on your car insurance, but it also may lower your interest rate on credit cards and other loans.
At Knapton, Reade & Woods, our agents will help you better understand how your car insurance rate is calculated and will ensure that you receive all of the discounts for which you qualify, including savings for a solid credit score. To get a free auto insurance quote to see if any of the companies we represent can offer this discount and perhaps additional credits to help save you money, please call us today at 603-464-3422 or click here to submit our online quote request form.
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