Your credit rating influences your auto insurance costs

When people think of the factors associated with auto insurance costs, the most common that come to mind are usually driving record, age, and the type of car you drive.

What many people don't realize, however, is that their auto insurance costs are influenced by their credit in some cases. So even if you have a spotless driving record, if you have a few blemishes on your credit, you may be paying more for your insurance.

Why do insurance companies look at credit?
One of the main jobs of an insurance company is to determine the likelihood that a driver will have an accident and file a claim; the more claims that are filed, the more money they lose, so the insurance company will charge higher premiums to those who are considered at-risk drivers. That is why previous accidents and speeding tickets will make your rates go up.

According to studies those with poor credit scores tend to file more insurance claims than those with better scores. Many insurance companies feel that a credit report is a more accurate measure of risk-people can get tickets off their records or tweak their motor vehicle records in ways that make them appear like safe drivers. With a credit score, however, it is more difficult to erase financial irresponsibility.

Insurance companies use a formula similar to a FICO score for determining credit. While it is top secret, just like credit scores, it was developed by insurance scoring company Fair Isaac and takes into account between 15 and 30 credit factors. Combined, the factors total a score that rates between 100 and 999. Although it is not the same formula and the scoring is different, it will correlate with your FICO score-the lower the score, the higher your rates are likely to be.

How much more will I pay?
More and more insurance companies are turning to credit scores as major determinants in your score. Insurance companies will charge customers with poor credit up to three times more than they would someone with an excellent credit score. If you have average credit, you can expect to pay normal rates, and if you have excellent credit, expect to pay less.

On the other hand, if you have excellent credit but a somewhat questionable driving past (say, tickets or accidents), many insurance experts say you have some leverage in terms of your rates if you are dealing with a company that takes credit scores into consideration.

Is it legal?
While most people don't know that their credit scores influence their auto insurance costs, auto insurance companies have actually been taking credit scores into account for at least the past ten years or so when determining rates. Not only is this legal, but by law they are not required to inform you that your credit score will have an impact on your rates.

However, there is a great deal of controversy surrounding the use of credit scores to determine your auto rates. This is especially the case for people who are working to remove erroneous charges on their credit reports. Many consumers also become frustrated because of the amount of time negative credit issues stay on their report-sometimes up to seven years, long after financial issues have been resolved.

Critics also argue that using credit score unfairly targets lower classes and that those who are least likely to afford higher rates are the ones who have to pay more. Regardless of the state, by law insurance companies are not allowed to discriminate against any group, race, or socioeconomic status by charging higher rates. They are, however, allowed to use risk factors in determining rates, and studies show that there is a direct correlation between risky driving and a higher percentage of filing claims and lower credit scores. Thus, insurance companies are able to charge more.

What can I do?
While it may seem unfair, auto insurance companies are not the only ones who check your credit score and use it against you. More and more employers, landlords, and others are looking at credit scores these days. For that reason, it is more important than ever to clean your credit score up and maintain a good score.

Improving your credit score
The following are some tips for improving and maintaining a good credit score, which can in turn lower your car insurance rates and be beneficial in other areas as well.

• Get a credit rating report. This should be your first step, especially if you're not sure what your credit score is or if you think it is damaged. Once you know what problems you have, you can go about fixing them and getting them off. You are entitled to one free credit report a year, which you can get from one of the three credit reporting agencies, Equifax, Experian, or TransUnion (keep in mind that credit reports are only free once a year, so if you have gotten a report in the past 12 months, you may have to pay a nominal fee.) Once you get your report, it will let you know what you need to do to improve your credit score if necessary.
• Pay your bills on time. The best way to improve your score is to consistently pay your bills on time. If you can't afford to make certain payments, call your creditors and set up payment plans. Use auto bill pay when you can, as this will automatically have your bills paid on time. This is especially helpful for those who are forgetful.
  
• Use credit cards only when necessary. A large part of your credit score will come from your debt to income ratio. So if you have a few credit cards and they are all maxed out or almost at their limit, it would be wise to start paying them down and only use them for emergencies.
  
• File any necessary disputes. If you find that you have errors on your credit report (a recent study indicated that 8 out of 10 credit reports had errors on them that affected the credit score), work with the creditor and the reporting agency to get them taken off. This is sometimes a long process, but it is worth it. Each of the credit reporting agencies has information on how to file a dispute.

The credit ratings that have been reported over the past 12 months are the ones that are given the most rate in determining your insurance rates. Once you have taken care of your credit issues and have paid your bills consistently for at least six months, start shopping around for different quotes again. You may find that once your credit score improves, your auto insurance rates will also improve, sometimes drastically.

Find out what the insurance company looks for
When you are shopping around for auto insurance quotes, ask them what factors are taken into consideration when determining your rates. It may be that the only factors from your credit report that will influence your rates are major blemishes, like bankruptcies or foreclosures. And some insurance companies won't even take your credit rating into consideration.

Shop around
Because rates will vary-sometimes dramatically-from company to company, even if you have poor credit, it still pays to shop around for the best rates. There are a number of companies online that will provide you with instant car insurance quotes.

Before you decide to exclusively look on the internet, you might also want to consider calling the companies direct and speaking to a customer service representative about your quote. This is a good idea for a number of reasons. First of all, they can answer any questions you may have about coverage. Car insurance can be confusing, and oftentimes people will buy more insurance than they actually need. Speaking with a representative will help you decide what coverage you do and do not need based on your state, and you can end up saving money in the long run.

Another reason to speak with someone in person is to find out how much your credit score affects your rate. If the company does tell you (and not all will) you can save your time and move on to someone else if you know you have a poor score.

Making smart financial decisions and paying your bills on time is not only healthy for your bank account and your credit score, but for your insurance costs as well. With many major companies using insurance scoring as a determining factor in how much you can expect to pay for auto insurance, it's important to carefully monitor your credit score and make sure there is nothing adverse on it.