Credit score can affect cost of auto insurance

Posted by peter88 from the Automotive category at 27 Dec 2011 03:57:11 pm.
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Drivers hoping to lower the cost of their auto insurance know that there are several tactics they can take to do just that. But many might not know that a better credit score can help reduce costs, as many insurance companies are increasingly turning to credit scores to determine rates and eligibility.

For years insurance companies have been looking at credit scores to calculate a payment rate for prospective subscribers and also to determine whether they will offer insurance in the first place. According to a recent survey by Conning & Co., a Connecticut-based insurance research firm, 92 percent of all insurance companies use credit information when underwriting new policies. Individuals who have missed two or more bills or who have a poor score could find they're asked to pay more for car insurance.

It used to be that car insurance rates were based on a few factors -- namely the age of the applicant, the make and model of the vehicle, the city or town in which the insurance would be issued (to determine likelihood of theft) and whether the vehicle had an alarm system and if it would be parked in a driveway.

Some drivers might wonder what their credit score has to do with their auto insurance premiums. According to statements by the National Association of Independent Insurers, credit score says a lot about a prospective client. Chances are that a person who manages his or her finances responsibly may also be responsible in other aspects of life -- including behind the wheel of a car. To an insurance company, a good credit score translates to good behavior and less risk.

Some feel that using credit scores to help determine premiums helps applicants, especially those with strong credit histories. But critics argue that this policy is unfair, especially in today's poor economy. Even the most responsible people could miss a payment or two because of layoffs or other factors beyond their control.

In 2005 in Ontario, Canada, the province prohibited the use of credit scores as a risk classification factor for auto insurance. Automobile insurance is the most regulated insurance product in each province and territory and is the only product in Canada for which the policy forms (including applications) need to be approved by the insurance regulators. Others living in Canada may want to check the legality and procedures in their particular provinces or territories to determine if underwriters are using credit scores as part of the process.
With all this information in mind, there may be some people who are looking for ways to improve their credit scores. Here are tips to do just that.

* Routinely check your credit report and address any errors.

* Reduce the amount of debt owed. That means avoiding large balances on credit cards or having too many outstanding loans.

* Pay bills on time. Set up payment reminders if you are forgetful, or take advantage of automatic bill paying.

* Don't allow any accounts to go into collections. Even after the bill is paid it can remain on your credit report for up to seven years in the U.S.

* Close out inactive credit accounts. Sometimes the more credit cards you have, the worse it looks for you.

* Consider that every credit inquiry goes on your credit report. If your credit standing is relatively new, realize that rapid account buildup can look risky if you are a new credit user.
Credit scores are just one factor in insurance underwriting, and it also helps to be a responsible driver as well. Accident history, age (teens are considered more risky drivers) and other factors will be used to determine an insurance quote. And as always, it pays to shop around.
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