Insurance premiums can be determined by your credit score

No one likes to pay for car insurance. It’s expensive and you never really get the feeling that you have gotten something for your money. The only time you get your money’s worth is when you have an accident, but no one wants to wreck their car in order to justify the money they spent on car insurance. That being the case, buyers want to spend as little as possible to insure their car. One would hope that the insurance companies would feel the same way.

Unfortunately, that’s not always the way it works. Sometimes, it seems, insurance companies look for reasons to charge you more, rather than less. A common practice now used by approximately nine out of ten companies is to examine the credit report of a potential customer to determine how much to charge that customer for auto insurance.

Your credit report is a file maintained by the three major credit bureaus - Experian, Equifax and Trans Union, which act as clearinghouses for financial transactions. Any major transaction to which you are a part - car loan, mortgage, bankruptcy filing, credit card account - will be noted on your report, along with any judgments, delinquencies or unpaid debts. That information is available to business from the credit bureaus for a fee, and most insurers now make regular use of these reports to determine how much to charge.

They don’t necessarily use the credit score of the individual to make that decision, but rather they use that information to create something called an insurance risk score. There are different types of credit scores, but the most common, the FICO score, is a number between 300 and 850 that represents, in a nutshell, if a borrower is credit worthy. A higher number is better. Insurance risk scores work much the same way, and insurance companies say that there is a strong correlation between those people who are financially responsible and pay their bills on time and those people who tend to avoid filing claims. And for the insurance companies to remain profitable, avoiding filings of claims is priority one.

What this means for consumers is that it is essential to keep a healthy credit score in order to make sure that you are paying as little as possible for your car insurance. It isn’t all that hard to obtain a top credit score; all you need to do is

• Pay your bills on time - Almost one third or your score is determined by whether you pay in a timely manner
• Have established credit - The longer you have had credit, the better. If you need to cancel a credit card, cancel a newer one instead of an older one.
• Maintain a reasonable debt to credit ratio - Try to make sure that you are not using more than 30% of your available credit at any one time.

These things take time, but paying bills on time is a key portion of the score. Just make sure you do that, and in time, your score should improve to the point where it can get you lower insurance quotes.

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