example credit scores from Equifax, Experian, and Transunion
Example credit score by the three main providers Equifax, Experian, and Transunion. Image: Flickr.

When you go to purchase car insurance, there are several general factors that insurance companies take into consideration when setting your policy rates. You understand that your driving record and car model are going to play a significant factor. They both directly relate to your risk as a driver but did you know that your credit score can also play a major part? Many people are shocked to learn that the late payments on their last credit card are coming back to haunt them in the form of high auto insurance premiums. On the other hand, some drivers use this method to their advantage and end up saving money. It can go in either direction depending on your score but why is it important to your insurance company any? You may not know just how important that little number is.

How is My Credit Score Calculated?

Your credit score is basically a report that tells people how good you are about paying your bills and paying them on time. Based on your history, you are given a number that ranges on a scale of 300 to 850. The higher the number, the stronger your credit score. If you have a low credit score, don’t fear. You can change it if you are diligent about making your payments from here on out.

Your history is gathered by three big credit bureaus: Equifax, Experian, and Transunion. Within these three companies, your payment history is analyzed and if a pattern starts to emerge, it can reflect your credit score. So, if you consistently make late mortgage payments or only pay the minimum amount on your credit card instead of the balance, your credit score is taking a hit. Alternatively, if you make your car payment on time and diligently pay off the entire balance of your credit card each month, you build your credit score.  So why do car insurance companies care?

Your Credit Score and Your Car Insurance

When you apply for car insurance, insurance companies are looking at how much of a risk it’s going to cost them to insure you. If you have a bad driving record, that means you have the potential to continue that habit of getting tickets and making multiple fender bender claims. If you drive an unsafe car, you have a higher risk of maintaining serious injuries in a car accident and possibly making more claims for repairs. So look at your credit score at just another way of measuring your responsibility. Of course the insurance company wants to make sure that you’re going to make the required payments to your policy but a credit score means even more than that. Research has shown that the higher credit score you have, the less likely you are to be involved in an accident. It may sound like two things that have no correlation but studies conducted by college universities and national organizations have come to the same conclusion over and over again.

Car Insurance Premiums

But my credit score can’t affect my premiums that much right? Wrong. It’s actually very surprising just how much money you can spend or save based on your credit score. conducted a study that compared credit scores and insurance rates. The findings were impressive. Young drivers aged 25-34 with a clean driving record would normally pay an average premium of $1,938 for comprehensive coverage. If that same driver had a credit score over 750, their premiums would drop by 40% to $1,155. On the negative side, if you’re credit score was between 500 and 649, the same driver would pay $2,023. Just based on this study alone, you can see how significant of a difference a good or bad credit score can have on your car insurance rates. Some argue that this isn’t the fairest way to calculate insurance costs but auto insurance companies defend it fiercely. It looks like credit scores aren’t going anywhere anytime soon, so the best thing you can do is work to lower your auto rates and increase your credit score.

Saving Money

Having good credit isn’t just going to reflect positively on your car insurance rates but will also affect other areas of your life. Having a good credit score will allow you to obtain a loan to go back to school, buy a car, or buy a house in addition to lowering your insurance. The first step is to know your credit score. Only retrieve it from the three trusted companies mentioned above to get an accurate portrayal. Once you know your credit score and are sure its accurate, try to pinpoint the behavior that got you to that point in the first place. It will take time to repair your credit score but it will be worth it in the long run. Not only will you have more options for financing opportunities but you can feel confident buying auto insurance. It’s always important to shop around for the best rates because different companies use different criteria for setting rates. Check your state requirements to make sure you receive a fair quote.