How Does Bad Credit Affect Auto Insurance Rates?

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You may have read that bad credit can increase your insurance premiums. But maybe you ignored this advice. After all, it’s not intuitive. Well, you might think, the difference can’t be this Wrong.

But one recent study by InsuranceQuotes shows how important your credit score is when it comes to insurance premiums.

According to the study, someone with an average credit score could expect to pay up to 36% more for home insurance than someone with excellent credit. And the gap between consumers with poor credit and those with excellent credit is even greater. In fact, in many states, consumers with poor credit could pay more than double what great credit consumers pay for their home insurance!

The chart below highlights the bad to excellent credit score gaps for the ten worst states:

A similar report of Consumer reports shows that credit differences similarly affect auto insurance, although the effects are often less pronounced. This report breaks down some of the “dark side” of this practice. He notes that auto insurance companies basically pick information from your credit report and feed it into their own algorithms. Consumers therefore do not have a clear idea of ​​the credit rating factors that most affect their auto insurance rates.

Why Does Bad Credit Affect Auto Insurance Rates?

It is therefore clear that your credit rating Is affect your insurance rates. But now the question is: why?

Credit scores are meant to predict consumer behavior. Your standard FICO credit score is put in place to show the likelihood that you will be in default. As such, it tells potential lenders how risky you would be to accept as a customer.

According to the National Association of Insurance Commissioners, the rating process used by your insurance company is different. This is called a credit-based insurance score, and it only uses certain elements of your credit report. The purpose of the score is to show the likelihood that you will experience a loss of insurance. In other words, this form of your score shows how risky you are for insurers, rather than lenders.

Insurers are only allowed to use this type of rating in certain states, although most allow it at some level. Like your credit score, your credit-based insurance score may not take into account certain personal information such as race, color, national origin, religion, sex, marital status, age and place of residence. Although some of these factors do account in calculating your insurance premium by other means.

Is this a good indicator?

For a long time, credit information has been used to determine whether or not you are a generally responsible person. This is why even potential employers can remove a copy of your credit report. But does being irresponsible with your finances correlate with being responsible as an owner or driver?

Maybe, but maybe not.

One report of the Federal Trade Commission concludes that people with a lot of missed payments, debts and recent credit inquiries are more likely to make an auto insurance claim. This is one of the reasons why insurers are allowed to use this information in their pricing decisions.

That said, some consumers and consumer advocates are not happy with the relationship between credit scores and insurance premiums. The InsuranceQuotes report points out that part of the problem is how dramatic the relationship between premiums and credit scores is. This can unfairly disadvantage low-income consumers. Sticking them with higher insurance premiums which, in turn, makes it harder for them to improve their credit scores.

Also, insurance companies don’t really know Why credit rating factors appear to be correlated with insurance behavior. And consumers can’t see the credit-based insurance score that insurers use to make those decisions. This can make it difficult for consumers to know how to get into a better credit position for insurance purposes.

So what should you do?

The bottom line here is that improve your overall credit score will improve your credit insurance score, although the correlation may not be one to one. So things like making payments on time, keeping your debt-to-credit ratio low, and leaving old accounts open so that you have a longer credit history are all important.

Speaking of making payments on time, you can really boost your credit when using Experian Boost ™. It’s free and takes your positive payment information and uses it to boost your FICO® score. Payments such as your utility bill and cell phone bill can now be taken into account when calculating your score. You can learn more about Experian Boost and start using it for free here.

Experian Boost Disclaimer – Results may vary. Some may not see improvement in scores or chances of approval. Not all lenders use Experian credit files, and not all lenders use Experian Boost impacted scores.

Learn more: Read our Experian Boost review

Following these steps shows that you are managing your finances well, which leads to a better credit score. This leads to a better credit based insurance score. You can thus save on both financial products and insurance.

Related: Best Emergency Loans For Bad Credit

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