If you have a low credit score, you might worry what it will do to your car insurance rate. Do insurance companies even look at your credit score? While the answer is ‘yes,’ they do look at it. The true answer is more complicated than that. Unlike loans where lenders pay close attention to your credit history before looking at any other qualifying factors, insurance companies have a more complex way to determine your rates.Get today’s insurance rates.
The Relationship Between Insurance and Your Credit Score
You might wonder what your credit score would have to do with your driving. The two don’t relate at all. However, studies show that people with low credit scores often have a higher likelihood of making a claim on their auto insurance. This is why insurance companies care so much about your score.
If you use this relationship, it would make sense that drivers with poor credit pay higher premiums than those with good credit. Of course, there are other pieces to the puzzle; this is just the first piece insurance companies consider.
Determining Your Insurance Based Credit Score
Insurance companies don’t use the same credit report that a bank would use before giving you a loan. However, they do access the same information from Experian, Trans Union, and Equifax. Rather than looking at your income, assets, and employment, though, they look at the following:
- The length of your credit history
- The negative events on your credit report (late payments)
- The number of accounts in good standing
- The number of accounts in collections
- The amount of outstanding debt
- The number of recent credit inquiries
The insurance credit score is then compiled based on the answers from the above questions.Shop and compare insurance quotes.
Basically, if you have poor financial habits, it will affect you in more areas than just when you try to get new credit. Getting insurance for your car could be more expensive than you had hoped.
Your Credit Score Shows Your Riskiness
Essentially, insurance companies are not trying to figure out how financially secure you are before they give you insurance. What they want to know is how risky you are because their neck is on the line. If they give you insurance and you make a claim, they have to pay it. While this is the idea of insurance, they want to charge you according to your risk. The lower your insurance based credit score, the higher your premium.
The higher premiums help cover the insurance company should they need to pay out on claims for you. If you have a good insurance-based credit score, though, your premiums should be lower. Of course, the insurance company takes into consideration your driving history as well.
The better your driving history over the last few years, the lower your premium. If you have a low insurance-based credit score but a good driving history, they will offset one another. While you might not have the best insurance rate, it’s not the worst either.
On the other hand, if you have a low insurance-based credit score and a poor driving history, you can bet you’ll have a much higher premium than other drivers with good records. You pose a double risk to the insurance company because of your credit score and your poor driving history.
The bottom line is that your low credit score may affect your car insurance premium. The better shape you are in financially, the lower your insurance premium should be. When you work on all pieces of the puzzle, making yourself a low risk for lenders, you are in better shape to get insurance with an affordable premium.Get the right insurance coverage.