Credit Scores and Auto Insurance Premiums

How Credit Reports Affect the Cost of Car Insurance

In addition to the type of vehicle and the insured's driving record, car insurance companies use a driver's credit score when calculating auto insurance premiums.

It's not that good or bad credit makes a driver a better driver; it's that insurance companies have found that individuals with poor credit tend to file more auto insurance claims than folks with good credit. Therefore, underwriters evaluate each driver's credit history to determine if a driver is considered a high risk from a claims perspective. Drivers with poor credit should expect to pay more for car insurance than their counterpart that has good credit.

Insurance companies look at five factors when it comes to evaluating credit and determining whether or not it will affect auto insurance premiums positively or negatively.

Payment History Affects Car Insurance Costs
When determining an insurance score, companies look to see if the driver has a history of making timely payments. Paying bills on time is looked upon favorably. They also take note of things such as bankruptcies, judgments and liens. Such negative public records will adversely affect car insurance premiums.

Outstanding Debt and Auto Insurance Premiums
The second most important factor taken into consideration is the number of open credit accounts, the amount of credit available and the amount of credit owed. Having several credit cards at or near the credit limit is a sign of financial instability. Insurance companies consider this a poor credit risk and charge higher premiums accordingly.

Drivers who wish to take advantage of lower auto insurance rates should reduce their outstanding credit to available credit ratio. In other words, using $20,000 of an available $25,000 in credit will cost a driver more in auto insurance premiums than if the driver only used $5,000 out of the $25,000 available credit limit; the lower the outstanding to available debt ratio, the better.

Length of Time Credit has been Established
To a lesser degree, auto insurance carriers look at the length of time the policyholder's relationship with creditors. Long term relationships shows stability while several a frequent turn over in creditors shows instability and is not looked upon favorably.

New Credit and its Affect on Insurance Premiums
Regarding new credit, insurance companies look to see how many new inquiries, and recently opened accounts drivers have. New credit can be viewed as a double edged sword. An excessive flurry of new credit and credit inquiries is not recommended, but a slow steady planned re-establishment of credit is encouraged. In other words, sending out 20 credit card applications in a day or does not do much to improve credit scores, or lower car insurance premiums.

Types of Debt and Car Insurance Cost
The type of established credit is also weighed when determining a driver's auto insurance policy premiums. Home mortgages are looked upon favorably as it shows a sense of stability and financial commitment. Credit cards don't hold the same amount of weight, but if used responsibility, credit cards can help to improve credit scores and thus lower insurance premiums.

Each credit category is not weighed the same. Insurance companies tend to give more weight to payment history and amount of credit owed. While the other factors are important, they carry less weight when determining insurance premiums. Therefore, if drivers want their credit to positively affect car insurance premium, paying bills on time and maintaining low balances on credit cards is a step in the right direction..