Just about everybody knows a low credit score can cost you thousands of dollars in interest when you finance a car.
Now, more and more people with low credit scores are paying higher auto insurance premiums, too, because research has connected lower credit ratings with higher incidences of claims.
If your credit score is on the lower side and you’re paying more for auto insurance, you have a few options:
- You could argue it’s not fair and tell your agent you’d be an exception to this general rule.
- You could ask your state’s insurance commissioner to bar insurers from considering your credit rating, as California, Hawaii, and Massachusetts have done.
- Or you could take control of the situation and start working to improve your credit score which will pay off not only with lower insurance premiums but with more borrowing power and lower interest rates as well.
How to Improve Your Credit Score
Each time your auto policy renews, underwriters could be checking your credit and insurance score as they calculate your new premiums.
Improving your credit score by addressing the following issues could start paying off sooner than you think.
Paying Your Bills On Time
Your bill-paying habits tell underwriters a lot about your willingness to take risks, according to the National Association of Insurance Commissioners.
You’ll get a lot of bang for your buck by improving this piece of the puzzle. It sounds simple enough, but if you’ve struggled, consider these strategies:
- Set up auto payments when possible: We get it. When money’s tight, you may need the flexibility to hold onto a bill payment until payday. So start with your lowest monthly payments — your student loan payment or a credit card bill, maybe? — and set them up to be paid automatically each month. That way you know those bills should never be late.
- Make a calendar: It doesn’t have to be elaborate. Just saving a list of monthly due dates on your computer desktop or your phone’s Notes app will do. Type an X or an asterisk when you’ve paid a bill for the month. Then, at the end of the month, reset the file for the next month.
- Pay a bill or two early: If your credit card bill is not due until the 20th but you have enough money to pay it on the 12th, go ahead and knock it out early. Otherwise, you may find other ways to spend that little windfall which could require you to pay the bill a few days late.
Reducing Your Debt
How much money you owe your creditors matters, too.
If you have a new, six-figure mortgage, a new car loan, and you just graduated from college with $35,000 in student loan debt, your hands may be tied with this one, so just do what you can:
- Keep your credit card balances as low as possible.
- Pay off a credit card or two if possible (but don’t close all the accounts).
- Avoid unnecessary borrowing.
Keep Some Accounts Open
We just said you should reduce your debt. So how can you do that while keeping credit accounts open?
By paying off your balances but stopping short of actually closing the accounts.
Doing this tells underwriters you maintain long-term relationships with creditors.
It also shows analysts you’re in pretty good shape:
You have, say, $20,000 in credit and you’re not even using it. If that’s the case, maybe you won’t feel the need to utilize every horsepower under your hood, either.
Credit Inquiries and Account Variety
These two areas comprise a smaller percentage of your score but are worth tweaking if you can.
- Recent credit inquiries: Each time you apply for a new loan, the lender likely checks your credit score. Frequent credit checks can mean you’re always seeking credit — a bad sign for fiscal responsibility.
- Account variety: If you have a mortgage, a car loan, a couple credit cards, and maybe a medical credit card or a personal loan, you already have a good variety of loans.
These two factors can contradict each other. You could create excessive credit inquiries by trying to build a broader balance of loan types.
But if you can achieve a more balanced array by closing some accounts (addition by subtraction), go for it.
For example, if you had two car loans or five open credit card accounts, paying off and closing one of each could help balance up your account types.
How to Check and Monitor Your Credit Score
Improving your credit score is a lot like improving your health. You have to make good decisions consistently and then wait patiently before enjoying the benefits.
Checking your credit score, however, is as easy as stepping onto the bathroom scale — actually, it’s easier since you might not even have to stand up.
The three major credit bureaus — Equifax, Transunion, and Experian — will give you one free credit report per year. They charge for additional credit score check-ups each year.
Until a few years ago, accessing your score directly from the bureaus would have been your best bet.
Now, though, you can access your score any time for free with help from Web sites and apps such as Credit Sesame or Credit Karma.
Credit Sesame takes checking your credit score to a new level by showing a breakdown of your score’s elements and offering suggestions — accounts you could open or close — to improve your credit score.
With Credit Sesame’s app, your credit score is just a phone tap away, and this kind of access can help prevent costly errors.
If you notice a sudden decrease in your score, for example, one of your creditors may have made a reporting mistake.
In the past, many people never discovered credit reporting errors until higher interest rates on a new loan or higher insurance premiums on a policy renewal clued them in.
Now, if you have a smartphone, or at least access to the Internet, you can monitor your credit score more easily, which means you can notice, report, and resolve credit reporting errors before they cost you.
Other Ways to Lower Your Insurance Premiums
Of course, your credit score isn’t the only factor your insurance company considers when it sets your premiums.
Any reliable information underwriters can gather will help them calculate your likelihood of filing a claim, and the more likely you are to file a claim, the higher your premiums will be.
Underwriters will consider factors such as:
- Your age.
- The age of your car.
- Your car’s safety features.
- Your driving record.
- How often you drive.
You can’t control some of these factors, such as your age or how often you need to drive. But you can drive more carefully and encourage others on your policy to do likewise.
Any time you avoid a wreck, you also avoid potential increases in premiums for years to come.
Remember, too, that auto insurance underwriters aren’t unique when it comes to credit-based insurance decisions.
- Your homeowners or renters insurance underwriters may consider your credit, along with other risk factors such as age of your home, your home’s location, and whether you have safety features such as a security system.
- Even life insurance companies may consider your credit score, along with your age, occupation, and health.
Each state regulates insurance differently, so if you’re interested in learning more about your credit rating’s impact on your premiums, check your local laws.
Some states, for example, require insurers to notify you when they look into your credit history. Others states allow you to prevent insurance companies from using your credit score, though insurers can respond by plugging in the lowest possible score which may cost you even more.
In a World Where Credit Matters…
The use of credit scores in underwriting decisions has been growing steadily for 20 years, and your score will likely influence your premiums for the foreseeable future.
Sure, it’s not always fair because some applicants inevitably will fall outside the limits of general correlations. Somewhere on the highway, for example, there’s a maniac behind the wheel who always pays his bills on time.
From an underwriter’s point of view, though, credit ratings provide a useful tool — a way to gain a quick and typically reliable insight into an applicant’s likelihood of filing large claims.
If you’re paying too much for insurance because of your credit score, it’s time to attack the issue head-on. It’s time to start the slow and steady journey toward controlling your financial life.
When you get there, your bank account will thank you every chance it gets.