Here’s why insurers care about your credit score

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Insurers take a variety of factors into account when setting auto insurance premiums, including a motorist’s driving history, address, vehicle make and model, and, surprisingly, their credit rating. At first glance, your credit rating may seem unrelated to your ability to drive safely, but the statistics tell a different story.

What does your credit score say about your driving habits?

Insurers view credit scores as a measure of driver liability. The indication is that those with high credit scores manage their money well and are more likely to behave more responsibly while driving. Likewise, those with lower credit scores could be less responsible drivers, which could lead to them having more accidents.

There is some supporting data, including an independent study conducted by the Federal Trade Commission (FTC). It found that drivers with poor credit were more likely to file auto insurance claims than drivers with better credit scores. There are always outliers, but that’s the general trend.

Insurance companies aim to minimize risk for themselves, so they consider just about anything that can be considered a reliable indicator of risk, including credit scores. Bad credit increases the average annual auto insurance premium from $ 2,646 to $ 3,622, an increase of almost $ 1,000. But it varies widely depending on the state and the insurance provider.

A handful of states, including California, Hawaii and Massachusetts, have banned insurers from assessing credit when setting insurance premiums. So, drivers who live in one of these states won’t have to worry about low credit raising their rates. But if a driver lives elsewhere, increasing their credit rating could save them a lot of money on insurance.

How to Boost Your Credit

To increase your credit score, you need to take consistent action over a long period of time. Try to do the following:

  • Pay all your bills on time.
  • Avoid using more than 30% of your credit limit on your credit cards each month.
  • Pay off any credit card debt you have.
  • Avoid asking for new credit frequently.
  • Do not close more than one credit card every six months.

You may also want to consider getting a secured credit card to help build your credit. These cards rarely offer any rewards and they tend to have low credit limits. Some also charge an annual fee. But card issuers will accept applicants with low credit and report payments to credit bureaus. As long as you pay on time, it could improve your credit score, but it’s important to keep your expectations in check.

It is not possible to increase your credit score overnight. Even if you do everything right, it will likely take months, if not years, to see a significant difference in your credit score. But that doesn’t mean you have to settle for sky-high auto insurance premiums during this time.

Some insurers penalize customers more than others for poor credit. Finding auto insurance can help you determine which company can offer you the best rate.

Drivers interested in proving their safe driving habits to insurers may also consider enrolling in one of the driver monitoring programs offered by a growing number of auto insurers. These usually require a driver to install a small device in their vehicle. It monitors their driving habits and reports to the insurer. Many companies offer drivers who sign up for these programs a discount just for doing so.

It is also useful to research a new insurance provider with each term of the policy to see if you qualify for a better rate elsewhere. If you really want to improve your credit and don’t have to file an auto insurance claim, you should see steady progress over time.

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