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UPDATED: Mar 13, 2020
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Yes, there is a correlation between the price of car insurance and credit ratings. In fact, a study completed by the Federal Trade Commission, confirms this answer and provides documented proof.
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During 2003, the Fair and Accurate Credit Report Transaction Act or FACTA was enacted and this new law provided consumers certain rights regarding their credit ratings. Additionally, it required the FTC to begin a study into the practices of car insurance companies and the way they utilized credit ratings when calculating the prices they quoted new customers.
Unfortunately, those customers who had poor credit ratings ultimately received the highest quotes and in turn, paid more on average per year for car insurance.
There are other factors that can lead to high car insurance rates, but credit ratings still remain at the top of the list.
Car insurance companies use credit ratings to develop models that help them to assess their new, potential customers and with the exception of a few small changes, they are used throughout the entire industry.
The Car Insurance Scoring Process
The car insurance scoring process is also known as the credit-based score and is pretty simple once you understand. Primarily, these agencies use the data contained in your credit report to determine how many, if any, claims you will file in the future. Because this results in major losses for the car insurance companies, they pay very close attention to this kind of information.
Many utilize all three of the major credit bureaus, Trans Union, Equifax, and Experian because they are the most accurate and well known. However, some rely on other methods, such as FICO based scoring systems.
The information within your credit report is separated into five areas, including credit history length, credit performance, kind of credit, current debt ratio and new credit. Using these key categories, they can determine the level of risk you pose and act accordingly.
While the majority of the car insurance agencies will not deny coverage for high-risk customers, they will impose much higher rates.
Since this process tends to generalize most customers, some car insurance companies will agree to lower your premiums over time. This is contingent upon several factors, including timely payments. Should you prove to be financially irresponsible, your premiums may not go down, but instead, they may increase substantially.
Checking Your Credit Report and Score
Luckily, you can check your credit report once a year absolutely free of charge. Simply log onto AnnualCreditReport.com and enter the required information. You will be able to review your credit report and this will give you the same information that the car insurance companies have. If you want to take a step further, you can even sign up for alerts that will notify you of any inquiries to your credit report.
Too many inquiries can cause your credit score to decline. Monitoring your credit report and credit score is a great way to be pro-active as well as protect yourself against fraud and identity theft.
To review your credit score, you can go online to any of the three credit bureaus listed above and for a small fee, gain access to your entire credit history, score, and all. Credit scores are rated from high to low in most cases, with an 800 to 820 being excellent and anything below 500 being very poor.
Most consumers have a credit score between 650 and 750, especially in light of the past financial crisis of 2008.
With foreclosures and unemployment skyrocketing, even the most frugal customer felt the pangs of a bad economy and had to undergo a little belt-tightening. The good news is things seem to be on the rise and this includes credit scores.
Improving Your Credit History
Improving your credit history can be a challenge, especially if it has dipped below 600. You may be in for quite a battle because you will need to curtail spending and begin to rely on what you have in your pocket, not your credit cards. However, it is something that can be done if you have the willpower.
First, review your credit report and look for errors. Anything that stands out as odd should be noted. Next, check for old or outdated information. Most vendors will not remove their information voluntarily, you will need to contact each one directly and advise that the debts have been satisfied. Ask them to take off anything that can be defined as derogatory.
You can also contact the credit bureaus and challenge any entries that look suspect. They must hear you out and investigate your claims. If you are lucky, the results will be favorable and you will receive an updated credit report within a short time.
Now comes the most difficult part. You must refrain from opening any new accounts and begin to pay down your debt. Do not get rid of your old credit cards or anything that has a long history, just try to improve your relationship with each vendor by paying as much as you can, as often as you can.
The car insurance companies will consistently monitor your progress and if they see improvement, you will be in a good position to negotiate lower premiums. Be warned, this may take anywhere between six months and two years, but the results will be worth your time and effort.
Ways to Receive a Fair Car Insurance Quote
As you work towards improving your credit ratings, you should contact your current insurance provider and ask them to review your account. Hopefully, you have continued to meet your financial obligations with them and they will appreciate your business. Make sure you have a copy of your most recent credit report while you speak with them and if necessary, offer to fax, or email a copy for their records.
More than likely, they will already have this information; however, if you just received your updated version, they may still have an older document. This is the best time to make your move. Many customer service representatives are not empowered to make decisions on rates, but managers do.
Never feel shy or uncomfortable. Escalate the call as high as you can go until you receive the rate you think you deserve. Do not push the envelope too far, but be fair. You should also be prepared to take your business elsewhere if they do not budge.
Remember, there are far too many other car insurance companies out there who would love to take you on as a customer. The competition is fierce and they know this. In the end, they just may feel you are still too high of a risk and that is fine. You can always start over with another provider.
Choosing the Best Car Insurance Agency or Company
So many car insurance agencies and companies are working hard to obtain new customers these days that you might think it would be easy to discern which ones are the best and whom to choose. But, the reality is, many simply will not offer you the type of policy or service you need or deserve. Too many want to put their customers in certain categories.
Choosing the best car insurance provider takes more than flashy commercials and funny jingles, you need someone who will stand by you when you need them most.
Checking the financial structure of a car insurance company is a wise choice to ensure your money will not be wasted. Check with A.M. Best to see how they rate. Look for a company that has a grade of A+ to A; they are the strongest.
Keep Your Policy Simple and Straightforward
Although car insurance companies do take credit ratings into consideration, you can stay in control. Keep your policy simple and straightforward and only choose the type of coverage you need. Stay away from any type of policy that seems too confusing or difficult to understand because you are afraid you may need it. The best types of car insurance policies are the exact opposite.
Educate yourself on the laws of your state and consider the age of your vehicle. Because cars depreciate in value, you are not obligated to keep the same level of coverage every year. Drop the extras, like roadside assistance and elect AAA instead. For approximately $60 to $70 per year, you can have the same services or more without having to pay high car insurance rates.
Unless you are financing your car, chances are you do not need anything except liability. Forget about anything else that will cause your premiums to skyrocket.
Also, think about carpooling a few times during the week or taking public transportation to work. This is something that many consumers fail to realize impacts car insurance rates. The more you drive, the higher your risk of collision.
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