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Imagine you were in the business of paying large sums of
money based on the actions of entire strangers. You would want to know - to a
near degree of certainty - how responsible those strangers were. If you were to
determine that a subset of those strangers were more likely to cost you more
money you may find it logical to charge that subset more for your services.
Auto insurance companies are no different. A lot of time
and money has been spent trying to identify subsets of people that are more
likely to be in an accident, make insurance claims and/or commit fraud. Odds
are that if you fall into one or more of the subsets identified as �more risky�
your auto insurance premiums will be higher.
Subsets can be made using many different types of data.
Where you live, your age, the type of car you drive, your marital status and
your driving record are all examples of data that puts you into different
subsets of the general population. You must realize that statistical data
covering large groups of people will not always be accurate when tested against
each individual in a group.
Take 16 year olds for example. Not every 16 year old will
get into an accident. It is just
statistically more likely that they will. Unfortunately, that means that
every 16 year old is likely to have to pay higher auto insurance premiums. It
stinks but it is necessary to keep us all from paying higher rates to cover the
costs incurred due to the actions of many 16 year old drivers.
When it comes to credit many people wonder why an insurance
company would need to know your credit rating before they will offer you an
insurance quote. After all, you pay them up front. They aren�t loaning you any
money. That is a fair question and I will do my best to help you understand.
The insurance companies have determined through the use of
statistical data that people having certain marks in their credit history are
more likely to cost them more money than someone that doesn�t have those marks.
Just like our example with the 16 year olds, this does not
mean that every person having such credit marks is automatically going to cost
more money to the insurance company. It is just statistically more likely that
they will. Unfortunately, that means that every person with those marks is
likely to have to pay higher auto insurance premiums. Again, it stinks but it
is necessary to keep us all from paying higher rates to cover the costs incurred
due to the actions of many drivers with negative credit marks.
In reality we all benefit somewhat from the use of subset
statistics in determining our insurance premiums. All you squeaky clean
insurance consumers will see up to 25% lower rates and while that may not seem
fair to those of you in the �not so squeaky clean� subsets, there is a silver
lining for you as well. After all, if it weren�t for this method of pricing,
those among us deemed �higher risk� might end up being unable to purchase
insurance anywhere.
So now that you know why the insurance companies want check
your credit and you can see that having poor credit can cost you more in auto
insurance premiums what can you do to keep your credit from raising your
insurance rates? There is not one single correct answer for this because
everyone�s situation is different and every scoring model may use different
credit factors.
In general, most scoring models use the following credit
factors:
- The length of credit your history
- Your outstanding debt owed
- Your amount of available credit
- The types of credit you have used (credit
cards, installment loans, etc.)
- Your late payment history
- Any past-due amounts you may have
- Your payment patterns
- Public records regarding liens and judgments against you
A hiccup in any one of these factors does not automatically
make you a �high risk� customer. All factors in a scoring model are weighed as
a whole to come up with a reliable prediction about your risk to the insurance
company. And don�t forget, your credit is just one of many factors used by the
insurance companies to determine risk. (Remember when I talked about the type
of car you drive, your marital status, etc.?)
Basically the steps are simple. Follow the advice given to
raise your credit score and be mindful of the
factors that affect your credit score. Depending on your situation it may
not be easy and it may take a while but this will give you a starting point from
which you will end up with better credit and hopefully lower insurance rates.
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