Editorial Policy

Fix Your FICO Score, Save on Car Insurance?

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By Eva Norlyk Smith, Ph.D.
December 6, 2011

Everyone knows that having a good credit score is important if you want to get approved for a credit card, mortgage loan or car loan.

But did you know that improving your credit can also save you thousands of dollars in car insurance?

Consumers with poor credit don’t just pay higher rates on car loans. They also pay much higher premiums on car insurance, say experts.

“I can’t think of anything that increases your insurance rates more when you first apply for car insurance than having bad credit, other, of course, than getting arrested for a DUI,” says Mike Sullivan, Director of Education for Take Charge America. “You won’t just pay much higher rates, you’ll also have much less flexibility when it comes to shopping around for auto insurance.”

How much more will you likely have to pay for insurance if you have poor credit? “A consumer with bad credit is going to pay 20 to 50 percent more in auto insurance premiums than a person who has good credit,” said Clarence Smith, former assistant vice-president at Conning & Co in an interview with Bankrate.com.

Insurance companies weigh credit histories when determining risk
Car insurance companies don’t necessarily use traditional credit scores. Instead, they get a specialized ‘insurance score’ from FICO or calculate their own insurance scores for drivers based on the person’s credit usage patterns as well as other factors. The insurance score provides an estimate for how likely the person is to make a claim against the insurance.

Unfortunately, if your credit changes, so may your car insurance premiums, even if you never have an accident.

“I’ve seen instances where people have lost a job and have been unable to pay for car insurance and had it cancelled,” says Sullivan. “Then when they went to get insurance again, their rates increased by 25 percent or more, even though their driving record was the same. When asking why, they get the response that they now are a greater risk.”

Some states, including California, Massachusetts and Hawaii, have laws that bar against the use of credit scores in auto insurance rate calculations. However, if you happen to live in a state where your car insurance rate is likely to be affected by your credit history, there are still steps you can take to improve your rate.

1. Find out what your insurance score is.
Find out how auto insurance companies see your credit record. For a small fee, you can pull your estimated insurance score from TrueCredit, a service of Transunion.

2. Take steps to improve your FICO score.
Improving your scores is not as hard as it may seem. Some of the key factors car insurers incorporate in credit-based insurance scores include the same factors that FICO uses to calculate credit scores, such as outstanding debt, late payments, recent applications for new credit, length of credit history and so on.

3. Get to know your C.L.U.E. report.
The C.L.U.E. report is auto insurers’ equivalent of a credit report. It provides a record of the past seven years of prior claim information for auto insurance losses, including loss type, amount paid and other relevant information.

Similar to credit reports, under the Fair Credit Reporting Act, consumers are entitled to a free copy of their C.L.U.E. report once a year to enable them to verify the accuracy of the information. You can request a copy from LexisNexis, the company that maintains the database.

Review the report for inaccuracies and follow the recommended steps to correct them to make sure insurers get the correct picture of your claims record.

4. Shop around.
Insurers use a variety of data to calculate your risk and getting quotes from multiple insurers can help ensure a better rate. Use an online service to get quotes from multiple insurers quickly and easily.

5. Ask for exceptions.
According to Consumer Reports, some insurers, such as Progressive, may rescore your insurance score if it has been adversely affected by job loss, medical problems or the death of a family member.