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Bad Credit Can Drive Your Premiums Sky High

You always use your turn signals, keep to the speed limit and have not had a car accident in years but your insurance company still won’t give you their best rate.

Why not?

While you are always safe on the road you may not have been as careful when it comes to your financial life. A bounced check or a trip to the collection agency can severely affect your credit rating, which in turn can affect your car insurance rates.

Why Do They Care?

Insurers use a wide variety of factors when setting rates for drivers. Your location, commute, type of car and your driving record are all taken into account. In addition, your credit report is considered. Insurers have discovered that drivers who have low credit scores are more likely to file insurance claims and insurance companies are not fond of customers who file claims.

Insurers claim that a credit rating is a solid predictor of risk. While it is possible to get your driving record changed or plead a DUI down to reckless driving it is very difficult to suddenly become financially responsible or change your credit rating. 

Insurance companies use a FICO score. If you fall on the downside of this score it can be a big problem. A poor credit rating is not just an inconvenience, it can make life much more expensive. Loans will cost more and insurance rates can double if you are carrying a sub-prime credit score.

Is it Fair?

Consumer groups have questioned the policy of using credit ratings to determine insurance rates. Their argument is that a poor credit rating is not always an indictor that the policyholder is irresponsible or that they will be filing lots of claims. Credit ratings can plunge for many reasons which are not always related to being financially irresponsible. People get divorced, lose jobs or fall seriously ill, which doesn’t mean they are ducking their bills, they are simply going through a rough patch.

Another issue is that credit reports frequently contain errors. As stolen identities become more common, credit reports that do not accurately reflect a persons credit standing are cropping up.

Affect on Insurance

It is almost impossible to tell exactly what affect a poor credit rating will have on a person’s premium. There are too many factors that come in to play, but in most cases it will raise the rate by 10 percent at a minimum. Insurers weigh credit ratings differently, while some may use it as a primary consideration, others barely consider it.  Hawaii, Massachusetts, and California do not allow insurers to use credit ratings at all when setting premiums. Currently, 26 states have a law on the books that forces insurers to notify consumers that their credit rating can affect their premium and does not allow insurers to decline coverage based solely on a credit history.

What Can You Do?

While there is not a lot you can do to immediately lower your premium due to a poor credit rating there are a few things you can do to help manage the problem.

Ask About Factors – When applying for insurance ask what factors they consider. While most will not tell you how much weight each factor is given, if you can find one that doesn’t look at credit reports or gives them a low priority switching insurers may pay off.

Fix Your Credit – If you know your credit is poor do everything you can to fix it. A bankruptcy or foreclosure typically takes 4-7 years to clear off your report but minor issues can be resolved in a year or two.

Check Your Report – Monitor your credit rating on a regular basis and check it carefully for errors. Credit agencies are required by law to investigate disputed items. Errors are more common than most people imagine.