Dec 6, 2013

Posted by in Insurance | Comments Off on How Your Credit Score Affects the Rate you Pay for Auto Insurance in Lebanon, PA

How Your Credit Score Affects the Rate you Pay for Auto Insurance in Lebanon, PA

You’ve probably heard that your credit score can affect the premium you pay for Auto Insurance Lebanon PA, but if you’re like most people, you don’t know exactly how it works. In this article, the Strock Insurance Agency will try to explain how credit ratings and car insurance premiums are related.

It’s FICO’s Fault

In the past, your car insurance rate was closely related to personal factors that could affect your risk level (such as age, gender, driving record and marital status). It’s common knowledge that younger, single men pose a higher risk than moms driving minivans, and premiums are correspondingly higher. However, the people at FICO (the Fair Isaac Corporation) have found a tentative link between high risk and low credit scores.

Insurance Companies Take Advantage

Ever since the link between credit scores and insurance risk was established, insurers have been using it to raise premiums–the practice is so common that about 97% of insurance companies do it. For the average driver (a 45 year old single female with no coverage lapses and no prior claims), a poor credit score can raise premiums by over 90%.

Many Customers Don’t See the Connection

As you may have guessed, there’s a lot of money at stake. However, according to a 2005 GAO (Government Accountability Office) report, about 66% of insurance buyers did not know that their credit score could affect their premiums, much less make them pay double if their credit was poor. And, if you buy your coverage from one of the 97% of US insurers that base rates partly on credit score, you may be paying a price for your unawareness.

Learning How it Works

The average driver doesn’t know much about how the credit/insurance link works. Individual insurers don’t divulge much about their pricing methods, and every company uses the score in a different way. However, there are some industry-wide commonalities, and there are two factors that make up about 70% of the score insurers use:

About 30% of your FICO score depends on your debt to credit ratio.

About 40% of your score is determined by whether you pay your debts on time.

Other less-influential factors include accounts in collection, bankruptcy, credit history length and new credit applications. By knowing how your insurer may use your credit score, you can take steps to minimize its impact on your auto insurance premium.

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