It is a common misunderstanding that your credit only affects your ability to borrow money; in reality, it may affect far more than that. It can also determine how much you pay for auto insurance. Here is what you need to know.
Credit-Based Score vs. Credit Score
There’s a distinct difference between a credit score and a credit-based score. A credit score is typically more comprehensive and is typically pulled when a person is borrowing money. A credit-based score can use aspects of your credit history to determine the risk of having you as an insurance client, for example.
Auto Insurance Rates Are Based on Risk
Not to be confused with credit risk, insurance companies use your auto insurance score—also called a credit-based insurance score — to determine the likelihood that you’ll file an insurance claim. How good or bad your credit is factors into your insurance score. Even more than your driving record, studies have shown that drivers with the worst insurance scores are twice as likely to have an insurance claim as those with the best scores.
Typical insurance scores range from 200 to 997; a good score is usually around 770 or higher. If your insurance score is low, that means that you’re potentially a higher insurance risk, and that you may end up paying a higher premium each month. If your score is high, then it’s saying you are a low-risk customer, so you’re likely to pay a lower insurance premium. That means that having a good insurance score can save you money — and it’s worth the effort to strive for having good credit.
How to Score Lower Insurance Premiums
Several aspects of your credit history can potentially help you get a lower premium. Three credit-based factors that can positively impact your insurance score are that all of your open accounts are in good standing, you have no late payments and you have a long credit history. Conversely, if you have accounts in collections, late payments, a short credit history and a high amount of debt, these could all end up negatively affecting your insurance premium. According to InsuranceQuotes.com, drivers with poor credit pay twice as much — a whopping 91 percent more on average — than those with excellent credit, while people with average credit pay 24 percent more.
While you can control your credit history, you can’t control your age, gender, or the state you reside in — which all factor into auto insurance premium rates. Despite these varying factors, establishing credit in the first placeis crucial to securing those lower rates. You can pay as much as 62 percent more for your auto insurance premiums if you do not have any credit at all says Wallet Hub.
Good Credit May Equal Saving Money
If you want to get competitive pricing on your insurance premiums, make sure that your credit is in good standing. Pay all of your revolving debt on time, and make any delinquent accounts current. If your credit is not in good standing, you may pay a higher premium until you’ve established a longer record of paying your debts on time.