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How your credit history impacts your car insurance rates

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By: Emily Miller March 26, 2015 0

How your credit history impacts your car insurance ratesBy Emily Miller

An individual’s credit history report serves as an indication of how financial stable a person may be, which is why more than 90 percent of insurance companies use it as one of the factors when establishing insurance rates.

In fact, almost state insurers does this – except for California, Hawaii and Massachusetts.

A bad credit history won’t just increase the cost of your car loan but will also increase your car insurance premiums.

Insurance experts have compiled data over the years that has shown a correlation between credit history and amount of claims filed. On the average, people who have a good credit history (i.e., pay their bills on time) file fewer claims than individuals who have a poor credit history (i.e., frequent late or delinquent payments).

The way an insurance company interprets your credit score is vastly different than how a lender interprets it. A lender uses a credit score to predict your ability to repay a loan while an insurance company uses it to predict the likelihood of you filing a claim.

If you are living in a state that allows a credit-based insurance score to influence rates, the impact of a poor credit history could be severe.

In a nationwide study by Quadrant Information Services, it was revealed that the average difference in rates between good credit and fair was 17 percent while the difference between good credit and poor credit was 67 percent.

Your credit history also influences the size of the down payment an insurance company requires and which payment options you are offered. The bottom line – the better your credit, the more money you’ll save.

It is also important to know what hurts and helps one’s auto insurance score.

According to insurance experts, the following are the most important factors when it comes to a credit-based insurance score:

  • Long credit history
  • Minimal late payments or past-due accounts
  • Open credit accounts in good standing

Typical negative activity includes:

  • Past-due payments
  • Collections
  • High debt level
  • High number of credit inquiries
  • Short credit history

One’s income, age, ethnicity, address, gender or marital status are not taken into consideration when becoming a credit-based insurance score.

The good news is that you can improve your car insurance score, which will ultimately improve your auto insurance premium.

  • Pay your bills on time and keep all accounts in good standing
  • Keep credit card balances low
  • Don’t open unnecessary credit cards
  • Establish and maintain credit early on
  • Make sure your credit report is accurate
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