Since bad credit is viewed as high risk, car insurance companies take advantage of the statistics that say people with bad credit are more prone to take chances and submit insurance claims then people with good credit. Whether this is a fair analysis or not, the only way to really avoid getting penalized for having bad credit is to work on regaining good credit.
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Car insurance companies charge extra money for having bad credit whenever they are allowed to do so by law. Since laws vary from state to state, not all insurance companies charge a higher premium if you have bad credit, but most states do allow the use of your credit rating to be a determining factor in the premium you are quoted.
What Determines a Bad Credit Rating for Car Insurance Rates
Credit scores are determined by a calculation that takes various factors into consideration. FICO (Fair Isaac Corporation) is the industry standard for credit reporting and sets the basis for the top three credit reporting agencies to determine their individual credit scores. In 2008, FICO changed their credit scoring system to help take a consumer’s complete credit history into consideration.
Understanding how insurance companies use credit rates is important. Some of the main changes that effect FICO’s role in your credit score include a smaller consideration of debt collection efforts that amount to less than $100 and the idea that single repossessions are not judged as heavily if everything else is positive. One change that may be good for some people and bad for others is the diversity of your credit history. If you have a mix of loan types, such as secured (mortgage or auto) loans, unsecured (credit cards) loans, personal loans, and student loans you will have a better credit score then if your credit report is made up only of one type of loan, such as credit card debt.
Several negative impacts also come with the new FICO scoring system, such as the less available credit you have the lower your score will be. This means that if your credit debt is close to your credit limit it will have a negative impact on your credit report. Also, while you may be tempted to close your accounts to help reduce your debt and maintain a cleaner credit report, closing your accounts is actually detrimental to your credit score. For ways to use these changes in your favor, see the section below entitled “How You Can Lower Your Car Insurance Rate with Bad Credit”.
While FICO set the new credit score range based on their change in calculations, you may still find out you have a different credit score from each of the three top credit reporting agencies. That is because while the agencies use the FICO standard, each credit bureau has its own methodology for reviewing your credit history and calculating your credit score. Although your credit score may be slightly higher or slightly lower from one agency to the next, it will most likely fall within the same category range.
A credit score in the high 700s is the best score you can obtain. The absolute highest your score can be is 850 and that occurs vary rarely. A credit score that is in the mid to high 700s is considered to be excellent and the low 700s are very good. A good score, and an average score, falls between 680 and 699 and anything from 620 to 679 is acceptable, which means you will probably not be denied credit but you won’t get the most favorable rates.
If your credit score is below 620 but above 580, you are in a credit risk category. This score is considered low and borders on a bad credit score of 500 to 579. The lowest range your credit score can be is 300 and anything that falls from 300 to 500 represents a very serious credit problem that requires professional help.
States that Allow the Use of Credit Rating to Determine Car Insurance Rates
Just as laws vary from state to state, laws change within the states. To find out if your state allows your car insurance company to use your credit report to determine your car insurance rate, call your state insurance commissioner. Most car insurance companies will ask for your social security number but you may not have to disclose it.
Having a social security number may make it easier to request a motor vehicle report and a CLUE report, but they are not required for those documents. A motor vehicle report will disclose any tickets, violations, or acts of suspension on your driver’s license. A CLUE (Comprehensive Loss Underwriting Exchange) report will reveal your insurance claims history. While these can be used to determine your rate regardless of the state you live in, they are not associated with your credit report.
If an insurance company asks for your social security number, ask them first why they need it. If they want to run a credit report on you they should have you fill out a consent form first. Before you agree to a credit report, confirm if your state allows the use of it or not. If your state disallows the use of your credit report then you should consider finding a different insurance company that will not use your credit score, especially if your credit score is low.
How You Can Lower Your Car Insurance Rate with Bad Credit
States that allow car insurance companies to charge more money for having bad credit don’t leave you with many options. Most car insurance companies offer competitive rating and use similar methods to deduce the rates you are quoted. If your quote is high because you have bad credit, then you only have a few options to lower your car insurance rate.
The first option is to shop around for lower rates from different car insurance carriers since competitive pricing usually works in the consumer’s favor. The next option is to take advantage of every discount and credit you can manage. Try to get multi-car discounts, multi-policy discounts, good driving discounts, car security credit, car safety credit, good student driving credit, and accident free credit. Your third step is to work diligently on raising your credit score so that you can request a rate reduction the next time your insurance comes up for renewal.
In order to raise your credit score, work on reducing your debt to limit ratio. Stop using your credit cards if they are out of control and start paying down your debt. Make at least the minimum payments on every card and then choose the card with the closest dept to limit ratio and pay extra on that card each month.
Once a card is paid, do not close the account. Keep the credit card locked away and only use it occasionally to make a small purchase that you pay off in full right away. This will help keep your available limits high, your debts low, and show financial responsibility which will ultimately increase your credit score and lower your car insurance rate.
As mentioned above, once you have a bad credit score it is likely that your car insurance rates will increase. Even if you are a responsible driver and you never have insurance claims, statistics show that people with lower credit scores tend to place in the high risk insurance category. Instead of simply accepting being penalized for this, try to get a better rate by shopping around with different car insurance carriers.
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