Understand Your Credit Score and How It Affects Your Insurance Policy

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One factor in determining the premium of a personal auto policy has nothing to do with a person’s driving record—it’s your credit record. According to FICO, a software firm that measures consumer credit risk, approximately 95 percent of insurers use an applicant’s credit history—his or her insurance risk score—to slot him or her into a certain program.

When a person applies for auto insurance, the insurer asks for permission to pull his or her credit information. The insurer then secures a credit report from one or more of the credit bureaus—TransUnion, Experian, or Equifax. For more information on credit reports or to secure a copy of your own report, go to http://www.credit.com.

Credit scores range from 300 to 850. If your score is below 650, you may have trouble getting insurance or you may have to pay a higher premium. In order to improve your credit score, keep in mind the following factors that influence the score.

  • Payment history: The largest factor is credit and loan account payment history. A steady record of on-time payments going back several years shows responsibility.
  • Debts owed: The number of accounts you currently have, including type and balance. Try to have just a few active accounts with low balances.
  • Length of credit history: The longer your credit history, the better.
  • New accounts: Every time you apply for a new account, a record of that application appears on your credit report and drops your score. Limit the number of applications you submit.
  • Credit mix: A credit mix of home loan and one credit card will likely result in a better score than someone with seven credit cards.
  • Negative records: Collections, judgments, and bankruptcy filings will drop your score.

(c) IRMI, Inc.

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