How important is your credit score? It may be more important than you might think. That three-digit number that follows you throughout your adult life regardless of whether you ever apply for a loan or credit card affects a number of things.
Your credit score can have a profound impact on many different aspects of your finances, from qualifying for a rental property to the amount your deposit might be on a cell phone contract. It can also affect another asset – your car insurance. Continue reading as we explain why car insurance companies run credit checks and how that process can impact your coverage.
What Car Insurance Companies Look for in a Credit Report
Insurance companies spend every day working on risk management. They look for correlations between certain traits and behaviors and whether they increase (or decrease) the likelihood of a driver filing a claim. Of course, that means they are looking at much more than just your FICO credit score. Instead, Consumer Reports states that most insurers look at about 30 specific components within a driver’s credit report to formulate their own insurance score. Examples might include:
- Late payments
- Length of credit history
- Amount of debt in relation to available credit
This insurance score is so important, in fact, that it can dramatically affect the amount you pay for car insurance, regardless of your driving record. A nationwide study in 2015 found that a bad credit score can negatively affect car insurance rates in some cases more so than traffic violations or even a DUI. That means that some insurers consider drivers higher risk if they fail to pay their bills on time than if they drive while intoxicated. Of course, not every insurance company thinks the same way. That is why drivers should work with independent car insurance agencies to get quotes from multiple insurers and find the one that is most competitive for their individual circumstances.
Will Applying for Car Insurance Affect Your Credit Score?
Anytime you are asked to provide your Social Security number for a credit check, it could send alarm bells off in your head. When you provide this sensitive information to lenders, for example, it results in what is known as a ‘hard’ pull against your credit report, which could ding your score. The good news is that credit checks for insurance companies are known as ‘soft’ pulls, which allow the insurer to examine your credit history without affecting your credit score. That means that while you will still be able to see record of the soft pull on your report, it will not affect your ability to qualify for credit in the future.
How to Optimize Your Insurance Score
While insurance companies do not reveal the details that go into determining an individual insurance score, there are some steps you can take to maximize your chances of getting a better rate. For example, we recommend always paying your bills on time and maintaining low debt-to-credit ratios on your revolving credit accounts. Of course, there are many other factors that affect the cost of your coverage, such as your driving history. You might also qualify for extra discounts that lower the cost of your policy – even with a less than perfect credit score.
If you’re interested in finding out how multiple insurance companies view your insurance score, and would like a free, no-obligation quote, give us a call, we’d be happy to help out.