Category

Insurance

Nov 16
0

Better Credit Score Means Cheaper Car Insurance

By | Credit Scores, Insurance

Car-Insurance-Credit-Score-Ovation-Credit

There are many benefits to having a better credit score. If you’re buying a house, it will be obvious you need excellent credit first. The difference in your interest payments could run $50,000 or more if you don’t bother.

The same situation exists when you’re getting car insurance.

That’s right, even your car insurance premiums are influenced by your FICO score. So improving your credit rating can save you money every month — and not just on your debts.

Meet the Credit-Based Insurance Score

There’s a credit rating for insurers to use that’s provided by FICO. It’s a credit-based insurance score, and most car and home insurance companies use it.

Home insurance rates can go up quite a bit if your score drops and a claim is made. This is because the risk of a fraudulent claim is higher if you’re struggling to afford the payments.

Car insurance companies are also known for jacking up premiums after claims are made. This is why many choose to pay off the cost of repairing the other person’s vehicle after a minor accident.

In reality, a poor credit score can result in a huge increase in your premiums. One incident can cost you $5,000 to $10,000 or more in the course of a year. The difference is an additional $400 to $800 out of your pocket every month to stay on the road.

How Does the FICO Auto Insurance Score Work?

Here’s how FICO calculates your auto insurance score:

  • Payment history (40 percent),
  • Outstanding debt (30 percent),
  • Credit history length (15 percent),
  • Pursuit of new credit (10 percent) and
  • Credit mix (5 percent).

This is only a little different than the traditional FICO score breakdown. You see 5 percent more importance on your payment history in the credit-based insurance score. This difference comes from a reduced emphasis on your credit diversity.

Remember: The Laws Vary by State

Not all states allow car insurance providers to use credit-based FICO scores. You can find your state’s department website and see how things stand where you live.

If you’re lucky, your state is one of the few that doesn’t allow insurers to use your credit score. This will prevent your bad borrower status from potentially costing you a lot of money due to your premiums going up. In one example on ConsumerReports.com, you can see more than $1,300 added to your monthly cost.

This instance is based on a single moving violation by a lone driver in Kansas. You can only imagine how much it would cost if you ran into multiple issues. You might even fail to qualify for insurance through certain strict insurers. It’s possible you’ll end up having to pay for a year upfront too.

The Problem With Credit Scores and Insurance

You might find your monthly costs getting higher all the time. A single moving violation could mean the difference in being able to pay your debts. This means you might be digging yourself further into debt even though the matter is out of your control.

All you can do is prepare for the worst. If your insurance premiums go up, you want the infraction to have minimal financial impact.

You can expect your premium to rise $100 or more per month from a single moving violation. Still, this is better than paying an extra $1,000 each month to stay on the road.

You can improve your credit rating and save money on car insurance. Since this is a cost factor, you can renegotiate on your monthly premiums when your FICO score is high. If the insurer refuses to negotiate — another insurance company may be eager to give you a better rate.

Does Your Insurance Affect Your Credit?

One saving grace is that this is a one-way relationship. Your FICO score impacts your car insurance costs, but your insurance won’t impact your credit score.

Since it’s not an inverse relationship, failing to pay your car insurance on time (or at all) will not hurt your credit. You won’t see a reduction in your FICO score — even if you end up in a financial disagreement with your insurer.

How to Save With a Better Credit Score

You can actually reduce your monthly payment amount by renegotiating your insurance terms. Wait until your FICO score goes up quite a bit before you do this. That way, you’ll be able to command a much better rate.

If you’ve had any increases to your auto insurance premiums, this might get reversed. Your decreased risk as a result of your better borrowing status could balance out the damage. Therefore, your monthly insurance costs could go down.

Conclusion

You want to better your credit rating and have access to quality financing opportunities. Whether you plan to start a small business or buy your dream home — your credit rating can make or break your dream.

With poor credit, not only will you get rejected for credit cards and loans more often, but your debts will cost you more. Even your car insurance — a recurring monthly expense — can go up as a result of poor credit.

In closing, it is clear that a strong FICO score comes with many rewards.

Jul 06
0

Credit Repair: How Does Your Credit Impact Car Insurance Rates?

By | Budgeting, Credit Reports, Credit Scores, Insurance, Personal Finance, Save Money, Your Credit

Does your credit impact car insurance rates?  You bet it does.  A recent survey confirmed that more than 90% of insurance companies use credit report data as a factor when underwriting new policies.  Auto insurance companies use financial history along with other factors (such as years of driving experience, type of vehicle and primary locations) to attempt to assess the potential risk of a driver.  Apparently, several studies have shown a strong correlation between a consumer’s financial history and potential insurance claims.  Basically, insurance companies feel that if you are responsible with your money, then you are more than likely to be responsible on the road. 

Do insurance companies use your actual credit score?

No, they use what it called an “insurance score.”  An “insurance score” is not the same as traditional financial credit scores.  Theoretically, an “insurance score” is supposed to help determine the likelihood that a consumer will file an insurance claim in the future.  A financial credit score is based on the consumer’s likelihood of defaulting on credit terms.   There are many different financial scoring models in use today, with the most popular still being the FICO score.

While the insurance scoring models are generally deemed as proprietary,  it is generally believed that the models rely on some if not all of the following:  length of credit history, late payments, new applications for credit, types of credit used, payment patterns, available credit, public records, and past-due amounts.  Of course, most financial scoring models are based on similar if not the same criteria.  Regardless of how the scores are calculated, the same general data is being used to calculate both your insurance score and your financial credit scores.

So what is the problem?

According to insurance companies (and the bureaus that make money selling this data to the insurance industry), there is no problem.   The use of insurance scores helps assess the true risk of a consumer, and as a result, premiums are more accurate.  In short, drivers with better credit are rewarded with lower premiums.  Those drivers with lower credit scores pose a greater threat for filing claims, so they pay higher premiums.  How much higher? Some insurance companies charge customers with poor credit as much as three times the rate for customers with excellent credit. This is a great example of why credit repair is an absolute must for some.  Can you really afford to pay three hundred percent more for auto insurance because your credit report reflects incorrect or incomplete information?

While struggling to pay for basic necessities such as food, shelter and medical, some consumers may miss a few payments, which will have a negative impact on their credit scores.  And even worse, credit reports notoriously have errors.  Up to 80% of credit reports have errors, and these errors cause consumers billions of dollars of year in unnecessary expenses, such as increased insurance premiums.  If credit reporting has become more accurate as some recent studies infer, we have yet to see it.

There is a vicious cycle in our country where consumers are penalized with higher costs when they have less than perfect credit.  In turn, the higher costs make it more likely that a consumer that is already having credit issues will have difficulty making payments, and therefore have more credit issues.   Costs increase more, and the likelihood of default increases more.   This pattern is well documented in the credit card industry where some balances spiral out of control when interest rates increase and excessive penalties are applied after a missed payment.

For most, if it difficult if not impossible to maintain full time employment without access to transportation.  Not all places have sufficient public transportation as an option.  When services that can be argued as necessity join the vicious credit cycle, the likelihood that consumers that are falling behind will fall further behind increases significantly.

Help break the cycle – don’t overpay for auto insurance.

One thing you can do – repair your credit so you are not overpaying for necessities like auto insurance.

 

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