A bad credit score could boost auto insurance costs by 50%

Man holding credit report

Did you pay your bills on time this month? How about last month? Your insurance company wants to know.

Your credit score, of course, is the result of a scoring system lenders use to decide how much credit they'll offer you and at what interest rates.

Many insurance agencies also use credit scores to help predict how likely you are to file an insurance claim as well as the likely amount of that claim.

Nearly all car insurance companies do this, as do an increasing number of homeowner underwriters.

A good credit score means that you're less likely to have an accident or file a claim and that any claims you do file are likely to be relatively small.

Insurance issuers typically look at an applicant's standard FICO score, order an "insurance score" from FICO or use their own proprietary credit-scoring system.

They're not interested in exactly the same things that intrigue the banker who decides whether or not to offer you a mortgage. Insurers focus on information that suggests how stable you might be, emphasizing whether you pay your bills on time and how long you've been managing credit and paying less attention to your overall debt or how many credit accounts you have.

A good score can save you money; a bad score can cost you. Someone with bad credit will pay 20% to 50% more in auto insurance premiums than a similar driver with good credit.

A good score, on the other hand, can push your premium bills below the company's average and might get you a better total rate as well. Insurance companies pass on the cost of claims to policyholders. By attracting responsible, careful drivers, they keep overall costs low, a significant competitive advantage.

Insurers are so sold on the connection between credit scores and claims that they might even offer better rates to drivers who have flawed driving records and excellent credit than to drivers with flawed credit and excellent driving records.

Even with dings on your driving record, your credit might make you a preferred customer for many insurers.

If you've got good credit, shop around for insurance. If your credit isn't so great, though, stick with your current insurance company until you can improve your FICO score.

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