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Low Credit Scores And How They Impact Your Auto Insurance Premiums

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Your auto insurance premium is determined by a number of factors: age, address, marital status, claims history, and more. But did you know that a low credit score can negatively impact your auto insurance premium too? If you’re one of the 56% of Americans who are in the subprime category for credit score, you might be paying more on your car insurance. 

Why do insurance companies penalize people for low credit scores?

Insurance companies assess risk and then pair that with a premium amount. Since those with lower credit scores file more claims, you’re in a higher risk bracket—and thus, a higher premium bracket too. 

Your credit score is different than your credit-based insurance score. 

If you have obtained a credit score from websites like FICO or Experian, that’s great, but these aren’t the numbers your auto insurance agency uses to determine your premium. In fact, traditional credit scores and credit-based insurance scores differ in a number of ways. 

  • Credit score is used by financial lenders and even employers when you apply for a loan, credit card, or job. A credit score is determined by analyzing your credit report—which is a report on your lines of credit, dates you opened accounts, loan and credit limits, and public record information like collections agency reports.
  • Credit-based insurance doesn’t use as many factors to come up with a score, but they do analyze payment history, debt, length of credit history, whether you have recently applied for new lines of credit, and the credit you have like loans and cars. Credit-based insurance uses its own model entirely and is why you may see a difference between than and your FICO score. 

How is credit-based insurance legal?

In California, Massachusetts, and Hawaii, it’s not. However, the remainder of U.S. drivers are subject to credit-based insurance policies. For those with higher credit scores, this is actually beneficial because you won’t overpay for a risk category you don’t fall into. For those with lower credit scores, this can hurt. 

Without legal action, drivers and policyholders must endure higher auto insurance rates for lower credit scores. Although, you can always shop around for the best auto insurance quotes to ensure that you’re not overpaying on any policy. 

Lower your premiums with steps toward a better credit score. 

Getting your finances in check will work wonders on your life—and your credit score and auto insurance premium rate. With a lower credit score, you can enjoy more loan options with better interest rates, lower APR on credit cards, and a lot less stress. Make your way to a better credit score with these steps:

  1. Apply for loans and credit all at once. You might not know it, but your credit score can drop for anywhere up to a year every time you apply for a new loan or credit card. No matter if you’re looking for a new car or mortgage or student loans and a credit card, do it all at the same time so your credit score won’t be lower than it should for longer than it should. 
  2. Don’t close your un-used credit card accounts. Closing credit card accounts can actually hurt your credit score. So if you consolidate cards, don’t cancel them. Just stop using them, put them in a drawer, and let that be that. 
  3. Get rid of “nuisance” balances on multiple cards. Small balances on a handful of cards don’t help your credit score. You can fix this by paying off the smaller balances and whittling your credit card collection down to just one or two.
  4. Always pay your bills. This may seem obvious, but a lot of people get into trouble when they skip payments. If you don’t pay your bills every month or pay large chunks sporadically, this will send a red flag to creditors and cause your credit score to plunge. Slow and steady is key, so at least pay the minimum balance to show you’re responsible.
  5. Up your maximum and don’t max it out. Raising your limits without getting close to maxing out your cards can raise your credit score. This can be a slippery slope if overspending is a habit for you. Don’t ever raise your credit maximum if you don’t think you can control the amount you charge.
  6. Budget and cut back. Avoiding overspending is a critical step in improving your credit score. If you follow all of the rules above but neglect this one, then you’re putting yourself in a bad financial spot which will make climbing out of debt impossible. By making a budget and sticking to it, you’ll know exactly how much you have to spend every month—and you won’t ever go over your limit. 



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