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How Your Credit Score Affects Your Auto Insurance

Everyone knows your credit score is important. You need a good credit score to get a mortgage, get a bank loan, and buy a car. But did you know that your credit score is important in determining your auto insurance premiums? Auto insurance companies use “auto insurance scores,” or credit-based insurance scores, to determine how much you pay on your insurance. If you’re not familiar with that term, don’t worry. You’re not alone.

Auto insurance scores are when auto insurance companies look at your consumer credit reports to predict future losses from filing a claim. A good credit score, or “FICO score,” makes you look like less of a liability to auto insurance companies, while a bad credit score can make it impossible to get a good rate. That’s because your credit score helps auto insurance companies know how likely you are to file an insurance claim or get into an accident.

Typically, auto insurance brokers look at what type of vehicle you drive, your age, your driving record, marital status, and more when determining your rate. But they also look at your credit score. The type of vehicle you drive can also affect what type of auto insurance you need. For instance, if you have a classic or collector’s vehicle, you’ll need classic car insurance.

Financial institutions look at your credit score differently than auto insurance companies. A financial institution looks at your credit score to assess your risk as a borrower, whereas auto insurance companies look at your credit score to assess your risk as a driver. Just like lenders, if your credit score is too low, auto insurance companies might think you aren’t able to pay your monthly premium.

Drivers with good credit scores (823 or higher) pay $1,130 on average for their insurance premiums while drivers with bad credit scores (under 524) pay an average $2,411 on their insurance premiums. As you can see, having a bad credit score can end up costing you thousands. Car insurance rates have risen 23% since 2011, so it’s imperative that you try to boost your credit score to save money.

At Frontlight, we want you to get the best auto insurance rate possible. We’re here to help you compare your car insurance, understand how your credit score affects your auto insurance rate, and how you can improve your credit score over time. Having a good credit score will save you money in the long run, and saving money in the long run can help boost your credit score. Win-win!

Types of Credit

You can build credit in several different ways. The most popular and easiest way to build credit is by signing up for a credit card. There are countless types of credit cards to choose from, as well as charge cards, store cards, rewards cards, and balance transfer cards.

The three biggest credit card companies are Visa, Mastercard, and Chase, but there are hundreds more to choose from. Each credit card company is different and calculates your interest rates using different equations. There are also different incentives to choosing different credit cards. Some credit cards don’t offer 0% APR, or annual percentage rate, as well as higher lines of credit, cash-back rewards, and fraud coverage.

Depending on your credit history, some cards are better than others.  If you’re new to credit, you’ll need a card with a low APR and a low security deposit. If you have great credit, you can consider cards that offer bonuses like free travel miles and luxury rewards.

Loans, like bank loans and car loans, are another form of credit you can take on. When starting a new business or buying a home, consumers will typically take out a loan from the bank. There are two types of loans you can take: secured and unsecured. A secured loan asks the borrower to pledge a form of collateral, usually a house or car, when taking the loan. An unsecured loan does not require collateral, though interest rates on unsecured loans are always higher.

Like credit cards, you typically pay loans off in monthly installments. Unlike credit cards, however, the term of the loan is not ongoing and is determined for a set amount of time. The shorter the term of the loan, the lower your interest rate. Expanding your loan term over several years can end up costing you dearly. Always choose loans with a short term and a low interest rate, and don’t be afraid to negotiate with your lender.

Length of Credit History

Just like a clean driving record, a long credit history is essential to improving your auto insurance score and lowering your rates. Consumers with little to no credit history, such as college students or those who’ve never owned a credit card, are less likely to get a good insurance rate. Without a long credit history, insurers and lenders alike can’t be certain that you’re able to pay your debts. That’s why the earlier you start generating credit history, the better.

Payment History

Your payment history is a big factor in determining your credit score. Auto insurance companies look at when you pay, how you pay, and how much you pay on your credit lines when determining your insurance premium. Payment delinquencies, or late payments, have a negative impact on your credit score. Conversely, making scheduled or advance payments on your credit cards and loans will raise your credit score.

Having a few missed payments isn’t a “score-killer,” but it’s important to avoid delinquent payments if possible. Similarly, having a perfect payment history isn’t a guarantee you’ll have a perfect credit score. If you’ve ever declared bankruptcy, been sued, or had your wages garnished, your credit score can take a nose-dive.

Bonuses of Good Credit

Apart from lower interest rates on credit cards, having good credit can be a helpful in many other ways. Drivers can save up to 17% on their auto insurance premiums by moving up their insurance scores one tier, e.g. from bad to fair or fair to good. Renting houses and apartments is also much easier with good credit, and you’ll be approved to rent at better places, or even places abroad. Cell phone contracts also rely on your credit score, and having a good score means you can negotiate a better contract.

How to Improve Your Credit Score

In three states, it is illegal for auto insurance companies to look at your credit score: California, Hawaii, and Massachusetts. In every other state, auto insurance companies will look at your credit score. In total, 92% of all auto insurance companies look at your credit score when determining your premium. That’s why it’s so important to have a good credit score before shopping for auto insurance.

The easiest and most direct way to improve your credit score is to responsibly manage your lines of credit over time. Beware of schemes that promise to fix your credit immediately, as these often backfire and result in an even worse score. It’s important that you don’t transfer debt from one place to another, and instead pay it off as promptly as possible.

Setting up credit card payment reminders is a great way of paying on time. Most banks even offer automatic payments. Set it and forget it! Reducing the amount of debt you owe is also essential, but hard to do. If you’re legitimately struggling to pay off your debts, speak with a credit counselor.

Don’t be ashamed if that’s you: millions of Americans are unable to pay back their credit card bills in a timely manner. Regardless, getting current with your payments and staying current will gradually lower your credit score even if you have missed payments.

So now you know a bit more about your credit score. It’s something we all know is important, but seldom consider unless we’re forced to. Don’t be afraid to check your credit score, as checking has no effect on your overall score. Consult with your FrontLight insurance agent and ask how you can get the best car insurance at your credit level. For whatever you most want in life, remember: with good credit, you can get it!