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Why Your Credit Score Matters for Your Insurance

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Why Your Credit Score and Car Insurance are Connected

Most insurance companies believe that your credit history predicts future insurance claims-filing activity. If you have a better credit history, it will mean fewer claims and fewer and smaller losses for the company. A lower credit score would mean a bigger risk for the company and this reflects on your premium.

It is widely acceptable for insurance companies to use information about your score. The Federal Fair Credit Reporting Act says that insurance companies have a permissible purpose to look at your credit information without your expressed permission, for underwriting practices. Underwriting is the process where an insurance company gathers information and decides whether they will insure you. Rating is a process that determines how much you pay for insurance.

Is Your Insurance Company Using Your Credit Score?

How do you know if your company are using your credit history? The simple answer is: ask!

Don’t let the insurance company keep you in the dark. It is also a good idea to ask if the company will check the credit histories of other people (such as family members) insured by your policy.

Is your premium based entirely on your credit history? It is possible that your company only look at your history, however, most rely upon a credit-based insurance score.

Credit Scoring

Things that may be used in credit scoring include:

  • Public records about bankruptcy, collections, foreclosures, liens, charge-offs, etc.
  • Payment history with the number and frequency of late payments and the days between the due date and late payment date.
  • Length of credit history
  • The number of times you have recently applied for new credit.
  • The number of credit cards and whether you use them or not.
  • How much you owe compared to how much credit is available to you.

Insurance companies do not want to stop using credit-based insurance scores. They claim that the current system improves the relationship between the insurance risk and the related price, so that those with a higher risk exposure pay more and those with a lower risk exposure pay less. They also claim that rates in general would go up if the system was no longer allowed.

So, your credit score matters! Make sure you know yours.

Finally, there are two things to remember:

  • A credit score is just a snapshot in time. If it is low, you can improve your credit score over time. Make a plan!
  • Insurance companies use credit information in different ways. Your insurance rates can and will vary from company to company.
About Mark
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5 Comments

  1. A good friend used one of these companies and paid a hefty fee. It didn’t help a bit.

    These companies don’t do anything that you cannot do yourself. If they claim that they can fix an improved credit report by removing most or all the negative credit information in your credit report, even if that information is accurate and current, it is a scam!

    And if they tell you that you should dispute all the bad information in your credit report, regardless, then be really careful.

    The law allows you to ask for an investigation of information in your report if you think it is inaccurate or incomplete. If you don’t agree with the result, you can add a short comment to your report. This is very simple and free.

  2. What about these companies that offer to “repair” your credit. What do they actually do? Does anybody have any experience with them?

  3. The credit score system is unfair and illegal. Why should private companies be allowed to keep information about me without my approval? I have a right to my privacy. These companies should only be allowed to save information about me when when I give my permission. Sure, if I want a loan, let them collect and tell my bank. But not until then. When did Americans give up their right to privacy?? These companies make money on ME and YOU!

  4. I appreciate the number of practice questions you can take at one time but it did get a little tiring all at once. The grading was what I took exception with if you have twenty questions and you miss three than that is an 85%, not a 57%, unless this was not straight percentage grading so I am a little dismayed with the scoring, still the answers were thorough and helpful. I just know I passed having gone to other websites to compare the questions Anyways, thanks

    • Stopping after 20 questions is what made your score end up as 57% instead of 85%. Percentage is based on a complete test. Skipped questions are the same as incorrect answers, just the way your real DMV tests will work. And I do understand that it gets tiring, so do your practice tests over a long period of time. That way you will also learn better. Good Luck.

4 Trackbacks & Pingbacks

  1. Get Your First Car With a Loan | Driversprep.com
  2. Getting Your First Auto Insurance | Driversprep.com
  3. Check Your Credit Report | Driversprep.com
  4. How To Really Save on Car Insurance | Driversprep.com

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