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Effects of Bad Credit on Auto Insurance

Most all of us are well aware of the importance of maintaining a strong credit rating in light of the effect our credit score can have on new home and vehicle purchases. With a poor credit rating, a consumer may have a hard time finding an affordable rate for an installment loan, and can even have trouble getting approved for a loan at all in some cases. But not as many people are aware of the effects bad credit scores can have on auto insurance rates. Believe it or not, your credit score may actually be more important than your driving record in determining the prices auto insurers propose to charge you for coverage.

Drivers with Bad Credit Pay More for Car Coverage

Insurance companies and other groups have repeatedly found that drivers with bad credit scores are more likely to file a claim than those with higher scores. Statistical information from the Insurance Information Institute indicates that drivers with poor credit file approximately 40 percent more claims against their auto insurance policies than do drivers with excellent credit scores. The same report showed that drivers with great credit and not-so-great driving records actually tend to pay less for their car insurance policies than do drivers with a perfect driving record and poor credit scores[1]. Though this data may seem counterintuitive, and certainly less than fair, it nonetheless points to the importance of maintaining an acceptable credit profile as a means of holding down the cost of car insurance.

A recent study by the University of Texas' Bureau of Business Research points to an even wider disparity in costs between consumers with good and bad credit in terms of insurance claims, showing a very strong positive correlation between low credit scores and elevated rates of auto insurance claims. The report indicated that people with bad credit scores had 53 percent higher rates of claim losses than the average [2]. Clearly, there are statistical factors at work when insurance companies choose to set premium rates partially based on credit scores. Does a low credit score necessarily make you a bad driver or a driver more apt to file a claim? No, but in terms of statistics, it does make you more likely than average to end up filing a claim. Much like the young driver victimized by his age even if he personally is a safe driver with no record of claims, you in the same way are somewhat shackled by a low credit score.

An auto insurance policy could (and probably will) cost you significantly more if you have bad credit, although in some states auto insurance companies are not allowed to use this factor in determining their rates. Not all companies choose to use credit scores as a factor in determining policy premiums, and certainly not all of them weigh the various factors they take into consideration in exactly the same way. Still, it is clear that anyone who has a poor credit score will have a very hard time finding affordable auto insurance coverage.

Most insurance companies use your credit information as part of a formula called an insurance risk score to determine how likely you are to file a claim if they take you on as a customer. Your claim risk or likelihood of filing a claim against your coverage is the basic risk providers are insuring against by providing you with a policy. They are essentially gambling that they will not have to pay out money on your behalf in a claim situation. Thus, the higher the perceived risk of claim, the higher the rate you will pay.

What You Can Do As a Bad Credit Auto Insurance Customer

If you have bad credit, you will certainly have a more difficult time finding affordable coverage for your vehicle. However, there are some things you can do to minimize the impact of your credit rating on your insurance premium, and strategies you can take on to combat the negative effects of poor credit on the cost of insurance. To begin with, all consumers should stay abreast of changes in their credit profiles, checking them at least once a year for accuracy. To help boost your credit score, take care of delinquent accounts and accounts in collection, make sure to pay your bills on time and do not overextend yourself on credit. Obviously, in today's economy, all of this is easier said than done; all of us are struggling through difficult times, and almost no one has been immune to some of the effects of the national economic downturn.

Even so, it is critical for your economic well-being that you do everything you can to escape the trap of letting your poor credit situation compound and end up compromising your ability to even provide your family with basic necessities like auto insurance. If you are given a higher insurance rate based on information that is found on your credit report, your auto coverage provider is required by the Fair Credit Reporting Act to notify you. They are required to tell you the specific reason for the higher rate. You are also entitled by law to a free copy of whatever credit report the company used in determine your rate. If you find that the report contains inaccuracies or erroneous information, you can file a dispute with the specific credit bureau providing the report, and ask for a new quote from the insurance provider [3].

Coping With Bad Credit Car Insurance Premiums

While you work to rebuild your insurance risk score and your overall credit profile by diligently paying your bills and making wiser choices with your credit, you can also make your auto insurance situation more palatable by doing some things to save money in the short-term. One simple strategy is to shop around for coverage if the company you are working with has raised rates on you due to a credit issue. Even if you have been using one company for many years and have yet to file a claim, you may become a so-called high-risk client due to a new credit issue appearing on your credit report. If this is the case, do bear in mind that not all auto insurance companies calculate premiums in the same manner, and some take credit into consideration more significantly than others. Before making cuts in coverage, try finding a new provider to give yourself some financial breathing room.

If all else fails, you can always do things like eliminate comprehensive and collision coverage or uninsured/underinsured motorist coverage to bring down your premium cost, but do so only if need be. The value of car insurance is the protection it gives you, and while bare-bones coverage may at least get you out on the road legally, it will do little to protect you beyond that. Bundling coverage with your home or life policies and other discount opportunities are worth exploring. Talk to an agent or search online for opportunities to save money on your existing coverage if at all possible. Work on saving money today while rebuilding your profile for tomorrow.

[1] http://www.peppercoin.com/200805/bad-credit-auto-insurance/ Retrieved 2009-12-06.
[2] http://www.insure.com/car-insurance/bad-credit-history.html Retrieved 2009-12-06.
[3] http://credit.about.com/od/creditreportscoring/a/insurancescore.htm Retrieved 2009-12-06.

 

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