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Why Auto Insurers Use Credit Scores to Determine Your Premium Rate

Like most Americans right now, you are probably looking for ways to save money. After reading up on car insurance quotes and coverage options, you want to know every way to get the most for your money. You do not receive a citation. You limit your city driving. You even take a driving course in efforts to reduce your premium. You are doing all the right things. Even if you are doing all of those things and more, if you are not considering your credit score, you are missing a piece of the auto insurance premium puzzle.

Having a low credit score can mean you do not get the best deal on your coverage, receive limited coverage, or be denied coverage at all by an insurance company. Credit scores have recently become a make or break factor for your car insurance, and you may not even know it.

A driver's credit score can cause his or her premium rates to increase. Drivers with a compatible type of vehicle, coverage option, age and location were paying drastically different rates based on their credit scores. You can have no accidents, tickets, or claims and be paying a higher rate based on your financial history. The better your credit score the lower your premium rate.

There are many factors that go into how high or low your car insurance premiums will be. Your age, gender, location, marital status, education, occupation and of course driving record are just a few variables. Insurance agencies say they use a variety of factors to determine the rate to make it fair.

Drivers needing to improve their record on the road have taken driver's education courses and defensive driving classes that are approved by their respective state insurance commissioner so they too can enjoy a low premium rate. City drivers will even carpool to help them avoid interstate driving.

Teenagers, who have long been a prime example for high premium rates when it comes to car insurance, can even receive a discount based on self-imposed driving restrictions and receiving good grades. There are many ways drivers are trying to save money and they are doing it by taking responsibility. Emotions arise when "safe" drivers have the potential to pay double the premium of an "at risk" driver all because of a credit score.

A few years ago, the United States Supreme Court found that using a driver's credit score was a reasonable addition to the list of variables. That means you want to learn what your credit score is and how you can do to improve your standing. Reportedly, insurance companies have found individuals with lower scores tend to file more insurance claims. With those results, insurance companies have justified charging more for auto insurance based on an individual's credit score.

Some states are addressing the issue on the state level to see if they cannot help their citizens through this difficult time. With the nation's economy continuing to seesaw without many positive results, consumers cannot afford to be paying extra based on one criterion alone. Just like you can do to reduce your rates based on other factors, you can work with your credit score to find the best premium rate for your auto insurance.

Ways to Fix Your Credit Score

One of the best ways to improve your credit score is to avoid making late bill payments or no payments at all. Payment history accounts for up to 35 percent of your credit score. When you do not make the minimum payment amount within the 30 days grace period from the due date, your credit score will start to decline, even dropping by 100 points or more. It can happen just that fast.

Having your score drop because of a delinquent payment can hurt consumers month after month as they struggle to play catch up with the late fees and additional interest. Your score starts to drop the first time it happens; there is no second or third chance with payments. Avoiding a late payment can often times be difficult, just make sure you resolve the issue as quickly as possible. You can make up the points you lost; unfortunately, it takes a longer period of time to gain good credit than it is to obtain bad credit.

Credit cards are a fast way to let your credit score slide, but they can also be a way to get your score back on track. If you know how to use the cards in your favor, your credit score will not suffer just because you have a lot of cards. Financial advisors claim that consumers should keep their balance no higher then 35 percent of their credit line. An example would be having a balance of $350 at the most on a card with a $1,000 credit limit.

You can consolidate credit card debts onto one account and try to get the new balance to be close to your credit limit. While getting rid of cards may seem like the best idea, you do not have to cut up the cards to slice your credit score. Closing out a short-term card may not have that much of a negative impact, but closing out a card you have had for 10 years or more will take away points off your credit history.

If you want to limit your cards, try to avoid having too many cards that can only be used in certain stores. Signing up for a card from major retailers including Macy's, Sear's, Home Depot or even Wal-Mart can make you appear to be a credit risk.

Take Action Now

Just because the insurance companies use your credit scores does not mean you have to settle. Do your research into the insurance company and see what they use to determine your rate. There are some companies who do not put as much weight on credit scores and if you are having a problematic credit situation, you may want to consider a company that will weigh other factors more heavily.

Shopping around is the best way to find a cheap car insurance premium rate. When you compare coverage options and prices with companies do not be afraid to ask an agent what they are using to construct your rate. Paying more for coverage will not help you get on track credit wise, so do not be afraid to show your findings to a prospective agent.

You can receive a free credit report from numerous outlets on the Internet and face-to-face agencies. Once you know what your score is, you can figure out what your next step of action should be. Insurance companies most typically either use the Fair, Isaacs & Co. three-digit credit score or use your score in their own formula. While they may not tell you exactly how it is weighed, you can call your insurer to see just how much your credit matters.

There are companies whose sole business is to help you re-establish your financial grounding. You can even sign up for notifications when your credit score is affected. Avoid credit swindles however by being weary of companies who claim they can repair or fix your credit. Visit the Federal Trade Commission's web site, www.ftc.gov, for more information on scams.

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