How Your Car Insurance Is Affected By Credit Score?


Your credit score is one of the most important financial records that you’ve got. Banks and other lenders regularly check your score to determine how well you manage your finances and if you follow the loan terms that you agree to.

The reason why credit score is considered to be more important than any other type of financial record is the fact that it cannot be artificially raised, it must be built up over time. Furthermore, it is generated using an algorithm that includes dozens of aspects of your financial life, from how you use your credit cards to how much money you borrow. It even includes information regarding how accurate you are with your monthly payments.

This having been said, this score also plays a very important part in what kind of deals you can get when you want to borrow money or to insure your property. It will affect everything from mortgage interest rates to how insurance companies will establish if you are likely to file a claim or not.

Only certain parts of your credit score are used by insurance companies

The insurance companies will not look at your entire credit score in terms of structure but at certain elements such as past insurance reports. In other words, things such as how much money you make or how many jobs you’ve changed in the last few years will not matter when it comes to what kind of insurance deal you will get.

All the elements that matter to the insurance companies are turned into a separate indicator called an insurance score. Here are some of the financial details that go into calculating it:

  • Existing debt;
  • Payment history;
  • Your history of late payments;
  • Credit utilization;

If you are using too much credit or if you regularly miss the deadlines for your monthly payments, you may be looking at more expensive insurance.

All the elements above, along with other details are weighted against the policyholder’s credit, along with any insurance claims that there may be and an insurance credit score is created. While there is no way to accurately calculate your insurance score, it is possible to make an approximation based on the details mentioned above. Generally speaking, if always pay your debts on time and you rarely use your credit cards, you can expect your insurance score to be high.

What are the details that do not matter when calculating your insurance score?

Things such as employment history or average monthly income will not play any part in calculating your insurance score. This means that even if you have recently quit your job or if your monthly income is relatively low, you are still likely to get a great insurance deal, based on your insurance score alone. Furthermore, insurance companies will also ignore the fact that you are looking to start a company, which would normally mark you with a higher financial risk rating.

Where you live is extremely important for determining your insurance rates?

One very important thing to remember when it comes to your insurance credit is the fact that it may not always be calculated in the same way. Each state in the US decides if it allows insurance companies to use the information contained in your credit score to generate the insurance one or to establish what your rates will be.

In states such as California, Massachusetts, and Hawaii, it is illegal for companies to use your credit score to determine what your monthly insurance rates should be. In these states, the insurance companies choose their own algorithms when it comes to establishing car insurance rates, or set them solely on your history of car accidents, the years that you’ve been driving, your monthly income, and other similar details.

This having been said, these are only 3 states where your credit score doesn’t matter. If you live in any of the other 47, you will have to make sure that you do not skip any monthly payments, do not use a lot of credit, and that you generally do everything that you can to keep your score up.

Conclusion

Your credit score is in many ways your financial calling card. Lenders such as insurance companies can use it to find out everything that they need when establishing if you are eligible or not for their services. The data contained within also plays an important part in determining what kind of monthly rates you will get when looking to insure your car or home.

Generally speaking, you should always try to have a good relationship with the bank and to make your payments on time. Even if you live in one of the three states where credit score cannot be used to establish insurance rates, having a good financial track record is important.