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It probably comes as no shock that your credit can have an impact on interest rates for loans. When it comes to your mortgage, auto loan or credit cards, the lower your credit score, the more you'll pay in interest. But did you know that your credit can also impact what you'll pay for car insurance?
According to some estimates, nine out of ten insurers use credit data in their evaluations of prospective and current clients. Here's how it works: an insurance risk score is based on the information in one or more of your three main credit reports. That information includes your payment history, the age of your accounts, types of accounts, account inquiries, and account balances. Insurers then purchase these insurance risk scores from third parties (FICO, the well-known credit scoring company, is one of them).
However, age, income, gender, race, religion, marital status, and geographical data are not included in the calculation of insurance risk scores. Further, it's important to remember that an insurance risk score is different from any of the credit scores you may have seen when applying for a mortgage, for example. But it's based on some of the same information: the data in your credit report.
If you're interested in seeing what's in your credit report, along with two free credit scores, you can use Credit.com's free Credit Report Card. It provides a breakdown of the information in your credit report using letter grades, along with your free credit scores.
If you're worried that your credit could unfairly impact your insurance rates, there are some protections. As Credit.com's Director of Consumer Education Gerri Detweiler wrote in a recent article on insurance myths.
In addition to the fact that you can't be turned down for insurance solely because of poor credit, you may also be protected in another way. According to Lamont Boyd, FICO's director of global scoring solutions for the insurance market, the majority of states have implemented provisions of the NCOIL model law (NCOIL stands for National Conference of Insurance Legislators).
Under those provisions, somebody who has gone through certain "extraordinary life circumstances" such as a catastrophic event (think hurricanes, tornadoes or flooding), divorce, death of a parent, spouse or child, temporary loss of employment (involuntarily) for three months or more, or identity theft, among others, "has the opportunity to go to their insurance company and offer that information so that the insurance company then can exclude their consideration of credit from their overall underwriting and pricing of that risk." He says, "That can benefit the consumer who has been negatively impacted by that extraordinary life circumstance."
Some take issue with the use of credit reports in the calculation of auto insurance rates, arguing that your credit has nothing to do with being a good driver. Nevertheless, credit data is used by companies offering auto insurance, so it pays to know where you stand and to be proactive when it comes to managing your credit.
What is a Good Auto Insurance Credit Score?
Now that you know that auto insurance companies use part of your credit file to determine the cost of your insurance premiums, you should also be aware of what a good auto insurance credit score looks like.
These credit-based insurance scores are very similar to regular credit scores and are also three-digit numbers that are calculated using the information from your credit report. The scoring system for auto insurance was established as a way to try and predict the likeliness of filing an insurance claim.
The three-digit number auto insurance companies use depends on the age of your credit history, the number of accounts you have that are currently in good standing, your on-time payment history, and how much available credit you are currently utilizing.
A good auto insurance credit score is a higher one; just like your regular credit scores.
How Do I Get My Auto Insurance Score?
If you want to know what your auto insurance score is because you are shopping for car insurance, then you can get it from Transunion. In the meantime, it is also a good idea to pull your credit from all three credit bureaus to see what the current health of your regular credit is.
Apples to Apples Comparison
When you begin to compare car insurance companies, it can sometimes be hard to determine which is best because they really are all so similar in many ways. So much so that it is often referred to as an apples to apples comparison.
The following are just a few simple ways you can compare auto insurance companies:
Research Their Track Record
Look for an overall rating for the company you are considering and see how many complaints they have had as well as the nature of those complaints. Read reviews, ask for opinions from people who have used their services, and take your time to do your homework and find out everything you possibly can about the company you are considering.
Once you have narrowed down the complaints, you can use these complaint ratios to start weeding out the companies who have the most dissatisfied customers.
Compare the Same Coverage
Next, you will want to do a comparison of the exact same coverage between all the companies still left on your list. Using the same information across the board will provide you with a more accurate comparison between the coverage options and premiums of all the auto insurance companies on your list.
Search for Discounts
Once you have narrowed that down, you can start comparing the different insurance discounts each company is willing to offer. Take a closer look at rental coverage, towing and roadside assistance options, and any other extras you may want.
You will want to maximize your savings on auto insurance by taking advantage of as many car insurance discounts as you can.