Why Do They Check Your Credit Score When Buying Car Insurance?

If you're looking for a discount on your car insurance, a clean driving history often isn't enough. Many insurance companies review your credit history as well as your driving record when they make a premium decision. If you haven't been keeping track of your credit score, you could be in for a rude surprise when you apply for car insurance.

Credit Score

Your credit score is a way to measure your risk as a borrower. This score looks at your past credit history to predict how you will manage loans in the future. If you pay your bills on time, don't keep large balances on your credit cards and avoid bankruptcy, you should have a good credit score. Bad credit habits like missing payments or keeping large balances on your credit cards hurts your score. A bad credit score will come back to haunt you in many different ways and not just in higher interest payments.

Impact on Insurance

While it makes sense that a bad credit score would make it more expensive to borrow money, the link to car insurance is a lot less clear. In fact, no one knows exactly how your credit score impacts your driving. However, there is a clear link between credit score and insurance claims. According to research by the University of Texas, drivers with a bad credit score had 53 percent higher claim losses than drivers with average credit scores. Because of this link, it's no surprise that insurance companies want to charge more for this extra risk.

State Laws

While there might be a connection between your credit score and your risk as a driver, many states limit how much insurance companies can use this data to raise rates. Some states do not allow companies to reject a driver simply because of bad credit. Others require insurance companies to notify drivers that they have a higher insurance rate because of bad credit. Some states do not let insurers raise the rates because a driver has no credit history. If you have bad credit, your state laws may give you the protection you need against high insurance rates.

Improve Your Rating

If you're not happy with your current insurance rates, improving your credit score might lead to a nice discount. Focus on making at least your monthly minimum payments and avoid missed payments at all costs. Insurance companies like to see a steady history of credit payments as this stability means a lower insurance risk. Also, regularly review your credit report for mistakes. It's possible that your current low score is a result of a lender incorrectly reporting your credit history. Use the goal of lower insurance premiums as one more inspiration to clean up your credit report.

 

About the Author

David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.