Your credit score doesn't only play a part in whether you can qualify for a home mortgage or auto loan, but your auto insurer may also use it to set the price of the premium you pay.
When determining your insurance rate, an insurance company looks for anything that suggests risk. Therefore, in states that allow the use of credit-based insurance scores to assess risk, a healthy credit score can help lower your auto insurance rate.
The Role Risk Assessment Assumes
Insurance companies generally base what you pay in annual premiums on the amount of risk you pose. In many cases, auto insurers assess your credit information just as carefully as how safely you drive, your age and gender, and the number of miles
Many auto insurers use some of the same factors that go into calculating your credit score to predict the likelihood that you will file a claim. How safely you drive is one of the key elements insurance companies use to determine the rate you'll pay. But a history of no accidents and not violating traffic laws isn't always enough.
Your credit score can have a significant effect on how much you pay. You may have a clean driving history and still pay high auto insurance premiums. But like your driving record, your credit score is a risk factor you can control.
The Part Your Credit Score Plays
Insurance companies don't use your credit score as such. They use their own scoring models to come up with your insurance score, but they still base that score on your credit score. For companies that look at components of your credit score to determine how much auto insurance will cost you, a poor credit score is certain to raise your rates.
Unlike banks and other lenders, insurance companies don't factor in your income and job history when calculating your insurance score. But like your credit score, paying your bills on time and keeping credit card balances low can improve your credit-based insurance score.
These and other of the same strategies you use to raise your three-digit number credit score can help improve your credit-based insurance score as well.
Lower Your Credit Card Utilization
Watch the balances on your credit cards. High balances often mean a drop in your credit score. Since your credit utilization ratio — the amount of your available credit you use — accounts for about one-third of your overall credit score, you'll want to keep that number low, ideally below the recommended 30 percent threshold.
If you use credit cards, apply for national bank-issued credit cards, and avoid those offered by department stores and other retailers. Retail-store credit cards often have low credit limits; therefore, it can be easy to spend near your limit, increasing your credit utilization.
Wait Between Applications for New Credit
Another way to lose points on your credit score is to apply for multiple lines of credit within a short period of time. Hard credit inquiries, like those that occur whenever you apply for a credit card, remain on your credit report for up to two years.
Applying for new lines of credit accounts for 10 percent of your credit-based insurance score — the same as the percentage FICO uses when calculating your credit score. Consequently, an insurer may see you as a higher risk if you frequently apply for new credit cards.
Dispute Inaccurate Credit Entries
Check your credit reports to make certain the information they contain is accurate. You can request a free annual report from each of the three main credit bureaus — Equifax, TransUnion, and Experian — that FICO uses to calculate your credit score.
Either incorrect or missing information can lower your credit score. Therefore, dispute any problems you find to prevent a drop in your credit score.
For these and other tips on how to lower your auto insurance rates, contact the agents at Insurance Designers who will work with you on finding ways to make your premiums more affordable.