When shopping for a new auto insurance policy, you might not be thinking about your credit score.
But should you?
Do you know that a low credit score matters to you when applying for a mortgage, car loan or credit card, but also insurance?
Yes, in most of the country that three-digit number will play a big role in the rates you pay, not only for your auto insurance, but for your home insurance as well. Some details of your credit report will even influence your life insurance assess.
Read on to find out how auto insurers use your credit to assess your risk and what you can do about it. prevent your score to run out of control.
Insurers Use Credit Information in Most States
In all but three of the states, insurance companies take your credit into account when calculating your premiums. So unless you live in California, Massachusetts, or Hawaii, your credit score will be taken into account.
(And sometimes Michigan: Last year Michigan passed a law prohibiting the use of credit scores in auto insurance, but not in credit information.)
Insurance companies do not use a traditional FICO score, however. Instead, they have their own “credit-based insurance scores”.
Why Do Insurance Companies Use Your Credit Score?
Insurers use credit data – on the theory that factors that lower your credit score (unpaid debt, late payments, collections and bankruptcies) also increase your risk of filing an insurance claim.
And there is research to back it up.
Actuarial studies have suggested that the way a person handles their personal financial affairs is a good predictor of insurance claims, according to the Insurance Information Institute professional group.
And, the United States Federal Trade Commission (FTC) released a report to Congress in 2007 that found that insurance scores correlate with the number of claims filed and the total cost of those claims. This led the FTC to conclude that insurance scores allow for more accurate underwriting and risk pricing.
Your credit information therefore allows underwriters to make an informed assessment of your risk category without having to fall back on personal judgment, hunches and prejudices.
The difference between FICO scores and credit insurance scores
FICO is one of the most well-known types of credit scoring. You are assigned a number between 300 and 850 – and the higher your score, the better.
There are five factors that influence your FICO score:
With credit-based insurance scores, the risk levels are assessed differently. You are also assigned a three-digit number, but the range is 200 to 999.
Your regular credit score is taken into account, along with previous at-fault accidents and other claims, insurance coverage failures, and late or missed payments.
Each insurer will use a slightly different formula to calculate your score, so while it’s possible to predict your range, it can be difficult to say for sure which number an insurer sees when you apply for coverage.
What you can do to get the best rates
So what does all of this mean to you?
Regardless of your credit score, you should always remember to shop around, regularly and carefully, to find the auto insurance policy that meets your specific needs. at this moment. Research has shown that those who don’t compare quotes every six months could pay up to $ 1,000 a year.
A free online tool can search quotes from over 200 insurance companies, and in minutes you will find the lowest prices available in your area.
However, it is important to regularly check your credit score. A mistake or misrepresentation can wreak havoc on your credit and force you to pay unnecessary extra on your insurance premiums.
If your score is accurate, but still not great, you have a few options. Credit monitoring, for example, can show results in as little time as a month.
Here are some other steps you can take:
Make all of your debt payments in full and on time.
Avoid using all the credit you have.
Keep accounts open to create your history.
Mix up your accounts: have different credit cards and secured loans.
Avoid applying for new credit cards often.
And, finally, avoid making claims whenever you can. Sometimes there is nothing you can do to prevent them, but be sure to follow the rules of the road and take care of your car to avoid being in a responsible accident as much as possible.
With your credit score failing and your claims capped, insurance companies will soon roll out the red carpet for you – or at least the stain and water resistant car carpet.