Car Insurance, Credit Score, and Savings
Several hundreds of factors help determine your car insurance premium. Traditionally, the biggest ones have been the safety rating of the vehicle, the theft statistics, how often you are on the road and where, and your driving history. Age is also important.
Now, however, credit score and history are also large factors, which is difficult to understand and even hard to accept for those of us with less than stellar credit scores. This guide will explore the issue, help you to understand, and give you some advice on making the best of the situation.
How Credit Scores Work
Several agencies track the spending habits, debt, etc. of people, using what they learn to come up with a credit rating or score that represents how much you can trust a person with money.
Miss a payment? Your score goes down. Bounce a check? Score goes down. Pay off a credit card? Score goes up. And so on and so forth.
When you go to get a loan or open a credit card, your limits and interest rates depend upon your credit score. If you have a bad credit score, you won't be able to even get a loan or open a credit card except under the absolute worst terms.
Through a practice known as credit scoring, insurance companies will also determine what to charge you based on your credit score.
The Idea Behind Insurance Credit Scoring
When a car insurance company looks at your credit score, they are thinking about it in terms of responsibility and the likelihood that you will keep paying your premiums.
Based on internal research, insurance companies maintain that people who are responsible with their money have good credit, and are also more responsible drivers.
Detractors say that this practice does two things:
1. It penalizes people twice for past mistakes. It's a double-charge.
2. It favors the wealthy and privileged and unfairly burdens people from poorer backgrounds.
Like it or hate it, credit scoring is a part of car insurance in most states. You should learn to live with it and work with it—perhaps even taking advantage—or fight to change the laws.
Take Advantage of Credit Scoring
If you have a strategy to improve your credit and really stick to it, you can raise your score and lower your car insurance premiums.
First, check your credit score. By law, you get one free report a year.
Correct any mistakes.
Next, begin paying down your debt. Start with the highest interest credit cards and loans and pay them off entirely or to one-third of the limit.
Your score will soar and charges sink.