Few people who are shopping for cheaper car insurance think about how their credit score may impact their rates. However, in most parts of the United States*, insurance companies use your credit score to help them determine how much to charge. Other factors, such as claims history, driving record, the type of car insured and age are factored in as well.
What is A Credit Score?
A credit score is a number between 300 and 850 that is used by consumer lending companies to measure a person’s financial fitness and ability to repay debts. The most commonly used measure is known as a FICO score, which was originally developed by Fair, Issac and Company in 1956. It is based on a number of factors, including length of credit history, income-to-debt-ratio and payment history.
A high credit score shows lenders that you are likely to repay loans on time. Thus, it is easier to get loans and low interest rates if you have a good credit score. In general, FICO scores correlate with the following ratings scale:
- 750 and up — Excellent
- 700-749 — Good
- 650-699 — Fair
- 600-649 — Poor
- Below 600 — Very poor
A higher credit score may also earn you cheaper car insurance rates.
Why A Good Credit Score Can Mean Cheaper Car Insurance
When an insurance company issues you a car insurance policy, it determines your premiums based on its degree of risk: that is, how likely you are to make a claim. In general, customers who pose a low risk to the company get cheaper car insurance.
Historically, insurers used factors such as how long a person had been driving, his age, his driving record and his claims history to determine risk. But over the last decade, credit scores have been added to the mix.
In 2003, researchers at the University of Texas McCombs School of Business did a study comparing the amount consumers cost insurers to their credit scores. They looked at about 175,000 policies and determined that the average “loss per policy” (the amount each customer cost an insurer) was $695.
But for customers with the lowest credit scores (the bottom 10 percent) that amount was $918. By contrast, those with the highest credit scores cost insurers a mere $558.
Although credit scores were considered by insurance companies prior to the University of Texas study, they have taken on greater importance in the years since. In fact, many insurance companies have developed their own credit scoring systems, which are presumably more predictive than FICO scores.
A Path to Cheaper Car Insurance?
Although there is little you can do to quickly repair broken credit or boost a low credit score, dealing responsibly with existing debt can help. Some suggestions from experts include:
- Get a copy of your credit report. Every consumer can request a free copy of his credit report every 12 months by visiting Annual Credit Report.com
- Review your credit report for errors and report any discrepancies or disputes immediately
- Reduce the amount you owe.
- Pay bills on time. Whenever possible, set up automatic payments through your bank or through the lender.
- Use credit cards wisely. Pay down balances rather than transferring them between cards, and limit the number of cards you have.
- Be aware that paying off a delinquent debt will not remove it from your credit report. It will stay there for seven years. However, it’s impact on your score will diminish if you pay your existing debts on time.
Having good credit is important to your financial health, and can be a big help when it comes to finding cheaper car insurance rates. But it’s also important to have an insurance agent you can trust. We at Carmoon offer you a wide array of options at prices you can afford, and we work with you to find the best solution to fit your needs.
Give us a call today at 516-292-3780 to set up an appointment for your business insurance review. We’re here every weekday from 9 a.m. to 6 p.m. Or if you prefer, request a free consultation online now, and we’ll get back to you as soon as we can.
*Critics claim that this practice unfairly discriminates against the poor and ethnic minorities. For this reason, the practice is illegal in California, Hawaii and Massachusetts.