A credit score is a summary of your credit expressed as a number between 300 and 850. Numerous institutions provide credit ratings, but best known is the score provided by the Fair Isaac Corporation (FICO).
However, as these ratings are not pegged to any universal credit score, financial institutions have various ways of determining their credit score ranges. As a result, while you may earn an excellent rating from one bank, your score may be only OK from another.
And not every industry uses the same system of rating. For instance, car insurers rely on their own scoring designed to narrow down your likelihood of filing a claim. The three-digit score considers how old your credit history is, your history of on-time payments and other factors.
Why are credit scores important to insurers?
In short, insurers want to know how likely you are to file a future claim.
According to Edmunds, insurers have used credit scores to determine car insurance premiums for about the last 20 years, and at least two studies cite a statistical correlation between credit scores and how much a driver pays an insurance company.
A lower score can ultimately result in a higher premium.
Do all states allow car insurance providers to use credit scores to determine rates?
No. In California, Hawaii and Massachusetts, car insurance providers aren’t allowed to consider your credit score when determining your premium. Instead, your rates are based on your age, marital status, driving record and the number of miles you drive each year, among other factors.
How much are insurance rates affected by credit score?
Let’s get down to brass tacks: How much will your credit rating affect your car insurance premiums? According to research conducted by finder.com, raising your credit score by 100 points could potentially save you up to $1,000 a year on your car insurance.
Drivers with good credit pay an average $3,275 for car insurance each year. This is roughly 42% or $2,377 less than drivers with poor credit pay. It’s also around 17% or $670 less than rates for drivers with fair credit.
According to our research, drivers with fair credit can expect to pay around $3,945 each year for their car insurance, which is 17% more than a driver with good credit pays, but also 30% or $1,707 less than rates for drivers with poor credit.
If you’re a driver with poor credit, you might shell out about $5,652 every year for car insurance, which is $1,368 more than than the average annual cost of car insurance for all credit ratings: $4,284.
If you project these costs over the next decade and raised your credit score from poor to fair, your car insurance premiums would go from $56,520 over 10 years to only $39,450, which is a savings of $17,070.
Go a step further and take your score from poor to good, and your insurance premiums could drop from $56,520 over 10 years down to $32,750 — saving you a cool $23,770.
How can you increase your credit score?
It takes time to repair your credit, but you can take simple steps to get your finances back on track:
Request your credit report. Jump online and request a free credit report, which will allow you to know the good and bad of what’s contributing to your score. If you spot an error, contact the provider or bureau to get it corrected.
Pay down your debt. To let lenders and by extension car insurers know that you’re a responsible borrower, keep your credit utilization at around 30% or less.
Don’t open new accounts. A surefire way to lower your credit score is by avoiding new debt. Every time you apply for credit, it’s listed on your report and pulls down your rating.
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