UPDATED: Jun 19, 2020
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At some point during the auto insurance shopping process, when you request a quote directly from a company, they will ask you for your social security number. This helps them run a credit check on your financial history. Insurance companies perform this check because they feel that your credit history is an accurate snapshot of how risky it will be to ensure you. But laws and regulations differ from one state to another; therefore, knowing how much they will charge extra for an imperfect credit score is extremely difficult for the average driver to calculate. Below, we’ll break it down for you. We will also help you find ways to raise a low credit score so that you can eventually save money on your monthly premium.
How Insurance Companies Use Your Credit Score
Like pretty much everything that has to do with insurance, figuring out how your provider is using your credit score to determine your premiums is convoluted and confusing. They don’t use your raw credit score, per se. What they do is run that credit score through an algorithm which calculates how financially risky it would be for your insurance company to cover you. This mystery number that their magical algorithm comes up with is known as your “insurance score”.
Your insurance score is rarely ever the same as your base credit score. For example, in most states, if you have outstanding debt from medical bills or other situations in which you had absolutely no control over the circumstances that led to your financial hardship, those will not be factored into your insurance score. With regard to your insurance score, the most important things in your credit report, as far as your insurance company is concerned, are:
- Late payments, especially for other insurance products you currently own or have owned in the past
- Your outstanding balance on all lines of credit you own, even if your accounts are current
- Loan defaults or bankruptcy
Of course, the amount of information on your credit report that your insurance company can use to determine your insurance score varies from both state-to-state, as well as company to company. For example, California, Massachusetts, and Hawaii have completely banned the practice of using a driver’s credit score in order to alter their premiums. In the other 47 states, some have strict regulations on how much of your credit information a company can use – while other states are extremely lax and give your insurance company free reign to use as much of your credit history as they want to charge you a higher premium.
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How to Change Your Credit Score (and Score Lower Premiums)
Most people get really confused when it comes to their credit report, their credit history, and how to change it for the better. If you’re one of these people, just know that you are not alone; in fact, you’re probably in the majority of drivers. But improving your credit score and getting a lower rate on your car insurance are much easier than most people think. If you’re concerned that your insurance company is charging you more based on your credit score, here are some steps you can take to improve it.
Get a Free Credit Report
One of the safest and most reliable ways to get a free credit report is to go to the Federal Trade Commission – Consumer Information website. It’s an official website run by the us government that allows you reliable access to your entire credit history. From there, you can see details about how much debt you owe, your history of late payments (if you have any), and whether or not you have unknowingly been the victim of identity theft. Once you have your credit report, if you see any mistakes, it’s very important to contact the companies who have reported these discrepancies to the major credit ratings agencies and get them cleared up as soon as possible. This is especially true if an identity thief has taken out credit in your name; the longer it takes to catch them, and the less proactive you are, the harder it will be to rebuild your credit score and avoid financial ruin.
Alternatively, if you aren’t all that keen on big government, there are private companies out there who will also offer you a free credit report which contains similar – if not identical – information to what the government has on file for you. One good thing about these companies is that they often offer extra services, such as credit improvement suggestions or help funding offers on credit what you can afford in order to improve your score over time. However, these websites aren’t always 100% reliable, and some very important information may be missing off of the credit report they give you compared to your official credit report. Furthermore, there are hundreds of unethical companies out there which will try to charge you money to generate your credit report. If any business or entity claims that you cannot get a credit report without paying a fee or signing up for a subscription service, you should stay away.
Other steps you can take to gradually improve your credit score over time – although some of them are easier said than done – include:
- Paying on time, and in full. One of the easiest ways to boost your credit score is to make sure you pay on time, all the time. Better yet, succeeding at this task helps you avoid late fees and interest charges, which will make it harder in the long run to improve your financial situation.
- Improving your debt to credit ratio. There is a sweet spot somewhere between how much credit is available to you, and how much you owe on outstanding balances which gives certain people a higher credit score if they fall within that range. Although it sounds crazy, having a lot of credit in your name but very little debt can be almost as bad as having too much debt and very little credit. In order to get the best credit score possible, you have to find the right balance between credit and debt, and maintain it for as long as you can.
- Report identity theft immediately if you find it. Yes, we know, we’ve mentioned this so much that it feels like we’re beating a dead horse. But this is quite possibly one of the most important things you can do to protect yourself and your credit score. It is becoming increasingly more common for identity thieves to take out lines of credit in other people’s names, max it out, and never make payments. Some credit card companies are better than others about staying on top of the fraud, but many others are less vigilant. The longer identity theft goes unnoticed, the more likely it can damage your credit report for years or even decades to come.
In the charts above, you can see how dramatically you can save if you build up a strong credit score. Unfortunately, if you already have less than perfect credit but you still want a better deal on your auto insurance premiums, building your credit score up takes time and effort. But one thing you can do right now is shop around and compare car insurance quotes among different companies. You’re virtually guaranteed to find a better price than what you’re paying right now – bad credit or no.