In today’s competitive insurance market, insurers requesting a copy of your credit report are not uncommon. In fact, it has become standard practice with a wide variety of agencies. Today, your insurance rates are not just pulled from thin air, or based on your driving record.
Even consumers with spotless driving records are subjected to paying above-average car insurance rates based solely on their credit history. Your credit rating is tied directly into your car insurance rates, coverage limitations and at times, even results in denial of coverage regardless of your history on the road.
Your payment history
Insurance companies offer their customers the ability to pay premiums up front, in six payments (for yearlong policies), in three separate payments (for six-month policies), or month to month. Since the vast majority of consumers pay their premiums month to month, a sub-standard credit rating means you are a higher risk to insurance companies.
For example, if you did not pay your Visa bill on time, it means that you might not be able to pay your insurance bill on time; this makes you a liability.
What you must remember is that insurance companies are all about risks. The higher your credit risk in the eyes of the insurer, the higher the likelihood that you will be subjected to outrageous premiums, or even find yourself denied insurance coverage.
Rate impact
Insurance companies don’t look at your entire credit history, and take your payments and credit hiccups into account when evaluating your risk. In fact, it’s quite the contrary. Insurance companies request a quick snapshot of your credit, also known as your score, to assess your risk factors.
A consumer sporting what is considered “bad” credit can expect to pay 20 to 50 percent more in premiums than consumers with good credit according to Bankrate.com. In other words, the lower your score, the higher your premiums.
What’s a “good score”? While there is no easy answer to that question, most credit issuers and insurance companies consider scores upwards of 700 “good”. If your score falls below this, you’re likely paying more in premiums.
Other factors
In addition to your credit score, insurance companies also request your insurance scores. Your insurance scores are comprised of your insurance claim liability in the past, with other insurers. Moreover, ironically consumers with poor driving records, but stellar credit are still likely to get the best coverage and rates despite a less than perfect history behind the wheel.
What you can do
Learn about the credit system and find out how to score. Thankfully, just because you have bad credit today doesn’t mean that you have to be sentenced to a lifetime of paying higher than average premiums. Bad credit consumers can rehabilitate their credit in as little as a year by putting some work into paying off old accounts, keeping open accounts current and monitoring their credit each month.
Shopping for insurance
Remember, every time a company pulls your credit it affects your score in a negative way. When shopping for insurance, know your score ahead of time by visiting the Credit Karma website. This site gives you three scores in one: your Trans Union Score, your Vantage Score and your insurance score.
If you want the best rate you have to do some homework on your credit first, but a little effort can pay off in big savings later on.