Credit Scores and Car Insurance

When you're in the market for car insurance, your credit score could have an effect on your rates. Most auto insurance providers use credit scores to determine the rates they'll offer to drivers.

This practice dates back more than 20 years and is legal in all most states.

What Is Credit Scoring?

Credit scoring is done by three major credit bureaus: Experian, TransUnion, and Equifax. This type of scoring determines the risk of extending credit offers to people.

Your credit score is based on a number of factors, including:

  • Length of your credit history.
  • Ratio of debt to available credit.
  • Payment history.
  • Number and types of accounts.
  • Whether you have recently applied for new credit.

It's important to check on your score here and there. Several companies allow you to view your credit score for free, without lowering your standing.

How Your Credit Score Affects Your Car Insurance

The lower your credit score, the greater the risk you are believed to have in the eyes of creditors and insurance providers. Therefore, you'll probably be charged higher car insurance rates. Adding fuel to the fire, studies have shown a statistical correlation between having bad credit and filing insurance claims.

On the flipside, a higher credit score should equal lower auto insurance and interest rates.

Improving a Low Score for Lower Insurance Rates

You can take steps to build or repair your credit, which should ultimately lower your auto insurance premiums.

After you get your credit reports from the three major credit reporting agencies, review them carefully. If you see any incorrect negative information, dispute it immediately. The credit agencies must remove negative information that cannot be verified within 30 days.

Other steps you can take to raise your credit score include:

  • Negotiating with your creditor to erase negative reports in exchange for settling your collection accounts.
  • Paying down debt on your credit cards AND using less of your available credit line.If you don't have a credit card, apply for one and make certain to pay off its balance in full every month.
    • If you are unable to get a credit card, consider getting a secured card or ask a close family member about being added as an authorized user on his or her account.

When your score has improved, contact your insurance company and ask them to recalculate your premium based on your improved credit. You may also consider calling around to different insurance carriers, just to see if they'll offer you a better premium for your higher credit score.