By June 29, 2007 2 Comments Read More →

Why credit scores affect your car insurance premium

Reader question:

How come your credit score affects your car insurance score?

Virginia

Great question.

It doesn’t make a lot of sense, does it? After all, although you do have a set yearly premium with car insurance companies, they are not the sort of business that you have an unbreakable payment contract with. If you don’t pay your premium on time, then it’s over. You’re uninsured, but you don’t owe anyone any money, and it doesn’t go on your credit report. So why should the two be related? For years, people just explained it away, saying that people with bad credit were just bad customers in general. More likely to be unreliable in their payments, they weren’t the steady sort of clientele that the car insurance business needed.

And credit scores do have a big effect on your auto insurance rating. The surprising thing is that they have any even greater effect than an actual accident would! If you started out with good credit, a good driving record, of a good age, and so on, and got into an accident, your premium would go up by a couple hundred dollars. That’s frustrating enough, but what would happen if your credit dropped down to the lowest rating? You’re looking at a premium spike of almost a thousand dollars, just because of your credit ratings.

Even if you have credit that would make a mortgage loan company happy, you might still be looking at higher premiums because of it, simply because car insurance companies look at credit reports in different ways than lenders do. Opening a lot of credit accounts in a short period of time,even if everything on your report is in good standing, could send your premium up. Every company was these reports differently, though, so you would do well to shop around if you don’t get in well with a certain company.

Cheers,

Fashun Guadarrama.

Posted in: Auto Insurance

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  • Baan

    I work in insurance, not car insurance, but technically no. Paying off a car does not make you less likely to not get into an accident. The only way to lower premium, is to be a safe driver and prove it for a time: no tickets, no accidents. Next, lowering your coverage will also lower your premium.

    But, since you are paying off your vehicle soon, why not keep the premium you pay now? You will already be saving money. Dropping to liability will only ruin your day when you get into an accident and that car you just paid off is trashed and you must start the monthly payment process all over again.

    It is better to have the insurance and not need it, then need the insurance and not have it. All it takes is one bad accident to realize how little the insurance costs. Stick with your current premium because you will already be saving money when your vehicle is paid off.

  • Stan

    Ca insurance is difficult to find with bad credit. Many car insurance companies consider credit score when determining rates so make sure you keep a good credit standing all the time. :)