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Car Insurance Rates and Your Credit Score

Car Insurance Rates and Your Credit Score

Your credit score is one of the most significant indicators of your financial stability and is a major factor in the rates you get for loans, credit cards, etc.

You might not realize, however, that your credit score can actually affect your car insurance rates, as well.

What is a Credit Score?

Your credit score is essentially a numerical value that is calculated using information from your financial history.

Your credit score takes the following information into consideration:

  • Your current total debt.
  • Your available credit.
  • Your history of bill payment (on time vs. late).

People with high credit scores will find it much easier to get approved for everything from a small personal loan to a mortgage, and will qualify for lower interest rates.

Credit Scores and Car Insurance

Credit scores are used by a wide variety of different banks, lending institutions, and even businesses to determine how credit-worthy a person is. Car insurance companies look at your credit history to determine what kind of risk you pose, meaning how likely you are to pay your premium on time.

Low credit scores may be an indication that you don't have an extensive credit history or that you've established a habit of paying your bills late.

NOTE: Not all states allow car insurance companies to use driver credit scores to determine rates.

Soft Hits vs. Hard Hits

When you get a quote for car insurance, one of the first parts of the process involves the company in question checking your credit history. Unlike some other credit inquiries, this will not negatively affect your credit score in any way, because it's considered a “soft hit."

All inquiries for your credit history fall into two categories:

  • Hard hits. These inquiries can stay on your credit report and have negative results.
    • EXAMPLE: If you were to apply for a credit card and get turned down, that information would stay on your credit report.
  • Soft hits. These inquiries do not appear on your credit score and do not affect your history negatively in any way.

Factors that Affect Your Rates

A large number of different factors affect your car insurance rate.

Depending on your state and your car insurance company, any of the following factors might affect your premium:

  • Your car's make, model, and year.
    • EXAMPLE: A sports car is generally more costly to insure than a larger, safer vehicle.
  • Your driving record.
  • Your location.
  • Safety features in your vehicle, such as automatic seatbelts.
  • Your car's primary use.
  • Your annual mileage.
  • Any discounts for which you qualify.

It's important to understand that your credit score is not the only determinant of your auto insurance rates. Great credit doesn't necessarily equate to low premiums.

For example, if you live in an area with a statistically high crime rate and drive a car make/model that is commonly stolen, you will typically pay a larger amount of money for car insurance because you pose an increased financial risk to your provider.

Of course, having solid credit and a good driving record are two of the best ways to get cheap car insurance.

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