It’s common for lenders to ask for a credit check when applying for a loan product, but does the same apply to insurance? Even if you don’t borrow money, insurers will still use your credit score to determine your premiums and predict insurance losses. Here’s why.
How does your credit score affect your insurance premiums?
Unless you live in Hawaii, California, or Massachusetts, US auto insurance companies will use your credit score to determine risk when providing insurance quotes. However, most of the information in your credit report is irrelevant and will not affect your bonuses, such as your income history.
Car insurance companies will primarily look at your payment history and total debt to assess risk levels. If you have a lot of debt or a spotty record, the insurer assumes you are more likely to file an insurance claim and miss payments. Unfortunately, high-risk drivers pay higher premiums.
What is considered a “good” credit score by auto insurers?
Auto insurers will offer you the best insurance rates at the “Exceptional” credit score level, which ranges from 800-850. The “Very Good” and “Good” levels, ranging from 740-799 to 670-739 respectively, always offer great rates. But, you could save hundreds a year with a score of 800+.
After 670, customers can spend 20% or more per year on insurance than someone with good credit. At 300-579 (“mediocre” range), policyholders can pay 50% or more on insurance.
If you have bad credit, that doesn’t mean you can’t save where it counts. It’s always important to shop for insurance online through comparison sites, like Cheap insurance, to ensure you get the best rate. Car insurers often share the best deals for new customers.
Are there other factors that affect your insurance premiums?
If you have a good credit score but your car insurance premiums are high, there could be other reasons why you are spending more than necessary. Here’s how most insurers calculate costs:
- Age or driving experience: Young drivers and seniors pay more for their insurance.
- Vehicle use: Company or construction vehicles can be expensive to insure.
- Vehicle model: Classic cars or luxury cars (Rolls Royce) are expensive to insure.
- Driving and claim history: A good driving record benefits your wallet.
- Geographical position: Urban drivers are more at risk of accidents and therefore pay more.
As noted, companies will offer different insurance rates for the same type of coverage. This is because some companies will weigh some factors more than others. For example, Insurer A will always increase your premiums to 60, while Insurer B will only look at your driving record.
How to increase your credit score and lower your premiums
Since auto insurance is mandatory, a low credit score won’t stop you from getting it. At the same time, you can’t get away with high rates unless you stop driving or improve your credit score.
Develop a long payment history
Young drivers often have high insurance premiums because they are more dangerous on the road and have a limited credit history. Young people can become signers on their parents’ credit accounts (if they have good credit) to start filling out their own payment records.
Settle your debts immediately
If you are in debt or frequently make late payments, start developing good spending habits. Create a budget that helps you pay off your revolving debt and automate your bill payments to improve your balance sheet. Consolidate large debt into one low-interest loan if needed.
Avoid filing unnecessary claims
It makes sense to file every fender bender or scrape, but it’s not always worth it. If the repairs cost less than the potential premium increase, you’ll be paying more out of pocket in the long run. Remember, this is mostly true for collision claims, not comprehensive claims.