2006-07-12
The Influence of Credit on Auto Insurance

Your credit score and report is used by insurance companies, lenders and employers to determine your ability to responsibly handle money on a daily basis. Lenders use credit scores to assess interest rates and fees while employers can look at a credit report to determine a potential employee's trustworthiness and level of fiscal maturity. You need to know your credit history before you apply for auto insurance because insurance companies will use credit scores as one benchmark to determine your level of responsibility.

Drivers need to consider their financial history as a reflection of their ability to pay premiums and fulfill obligations laid out by an insurance policy. A driver who has lost their job, failed to pay even the minimum payment on their credit cards and lacks a history of sound money management can have a perfect driving record but still experience high premiums. A lack of credit history is nearly as bad as a poor credit history in the eyes of auto insurers. A young professional who does not have a car loan, mortgage or series of payments on personal lines of credit lacks the tangible financial history that auto insurers use to assess insurability.

Credit history issues can lead to exorbitant premium rates or denial of coverage altogether by insurance companies who are trying to narrow their coverage to low risk policy holders. As you shop for auto insurance, you need to realize that achieving a lower premium requires long term financial planning that will improve your credit history. The first step in staving off rejection and high insurance premiums is to order copies of your credit report before signing up for a new policy. The Fair Credit Reporting Act provides for a free copy of the credit report used by insurance companies to determine your financial history. You can settle any disputed charges and credit lines on your credit report before you apply again for insurance benefits and coverage.

The process for fixing poor credit scores begins by paying your bills on time. You need to think several months ahead of your current policy's lapse in order to increase your credit score. Insurance companies use ranges of credit scores to determine their premiums so an increase of a few points can make a big difference. You can pay a little above the minimum payment on time each month to help improve your credit profile. You also need to order copies of credit reports from the three major bureaus on a semi-annual basis to see your financial responsibility in action.

Individuals without a credit history need to put aside their apprehensions about credit cards and begin building a sound financial history. You can order a credit card with a relatively low monthly finance rate, pay for everyday charges with the card instead of cash and pay off the entirety of that debt each month to draw the positive attention of insurance companies. Applicants without a history of positive credit can also play around with deductibles and financial limits in their insurance to decrease the premium. In the end, you need to empower yourself and learn the nuances of your credit history to avoid embarrassing situations and lapses in coverage.


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