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Auto Insurance Premiums and Credit Scores

Author: John Smith  //  Category: auto insurance tips

You might already know that credit card companies, mortgage lenders and other types of creditors check your credit score, but your score also affects your insurance rate. If your score falls, you may find yourself facing a significant rate hike when you renew your auto policy or switch insurers, even if your driving record is spotless.

Auto insurers use seven common factors to decide premium rates. Insurers consider your gender, driving record and how long you`ve had your license. Your age, where you live, your car`s value and how you`ll use your car, such as your annual mileage or how far you drive to your job, also impact your premium rate. Over the last decade, insurers began to include factors known as “income proxies” when deciding customer premium rates. Income proxies include your highest education level, your work field and your credit score. Not all insurers used income proxies and some companies may only use one or two proxies, such as your credit score or work field, along with the seven standard factors to determine your premium.

A poor credit score raises your level of risk to the insurer. In the insurer`s view, if you`re behind on your bills, you may not pay auto insurance premiums on time. The insurer charges you higher premiums to cover the increase in risk. A lower credit score is also associated with a higher rate of claims. Financially distressed people are more likely to have accidents and traffic violations, so an increased premium helps cover the insurer`s potential future loss.

If you have a damaged credit score, shop around for rate quotes before committing to an auto insurance policy. Ask agents whether the insurer uses income proxies to calculate premium rates and if so, which proxies the company uses. If the agent can`t give you a clear answer about income proxies, it`s likely the insurer uses proxies to fix rates. Comparison shopping may save you a significant amount of money on auto premiums if you find an insurer that values your driving record more than your credit score or doesn`t use income proxies.

Raising your credit score is another way to avoid high auto insurance premiums because of a low credit score. You`ll need to pay off old debts, pay down current accounts and get a new account that has significant weight with the credit bureaus. Car loans and mortgages, for example, impact credit scores more than credit cards and other open-ended accounts. You will face difficulty getting a traditional car or home loan if you have a weak credit score, but there are some options, such as a buy to let mortgage.

Considered to be a riskier investment, buy to let mortgages at allow you to use a mortgage to get a home for investment purposes. You buy the property and rent it out to tenants. The potential rental income is factored in during the mortgage qualification process, making it easier for those with poor credit to qualify. Not only does it bring in extra income, but also your credit score will improve as long as you make your payments on time. Once you`ve raised your credit score, get several auto insurance quotes before renewing a policy to make sure you`re getting the lowest premiums available.

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