We may earn money or products from the companies mentioned in this post. I never recommend anything I don’t personally use and fully stand behind.
Today, we’re excited to have Mark on our blog today, sharing tips on how to save on auto insurance.
Mark B. Huntley is a real estate investor, lawyer, personal finance writer, author, father, outdoors-man, spontaneous traveler, and will always be Padres faithful. Presently, he spends most of his waking hours producing content for the personal finance website he co-founded, CreditKnocks.com. His motto is – There are only three things you can count on in life… death, taxes, and late payments will ruin your credit score.
Your Driving Record is not the reason your insurance is high
Sometimes as you’re reading an article, you realize that there are some surprising facts you’ve never heard of. It’s a startling discovery, especially when it affects your money.
This may be just one of those times…
Traditionally, credit scores are used by lenders to determine consumer risk based on their credit history, according to MyFico.
The basic concept works like this. The lower your credit score, the higher risk you are to a lender.
To offset this risk, the lender will usually offer a line of credit with a higher interest rate.
This seems like a fair and logical way to determine interest rates in most cases. Your credit score provides information about your payment history, how long you’ve had each credit line, and what your current credit limits are.
Credit Score Determines Your Auto Insurance Premium
According to Consumer Reports, Auto Insurance companies changed their cost calculation strategy. They started using credit scores as a way to determine insurance premiums in the 1990’s.
By the early 2000’s, most auto insurance companies charged higher premiums to consumers with low credit scores. Suddenly, credit scores were more important than driving history.
So much so, that a person with a perfect driving record and poor credit could pay 25% or more than a person with excellent credit who had a DUI or a DWI on their driving record.
How’s that stomach feeling?
Because it gets worse…
The earlier mentioned Consumer Reports study started by collecting auto insurance premium data for single drivers who had credit scores considered; excellent, good, poor, and excellent with a DUI on their driving record.
You won’t believe what they discovered!
Most Americans believe that the single most significant factor affecting their auto insurance premium is their driving record.
Here’s a startling fact…
In Nevada, a single adult driver with a clean driving record and EXCELLENT credit score will pay an average of $1,295 for annual auto insurance.
However, that exact same driver would be charged $3,323 for the same auto insurance premium if they would have had a POOR credit score.
While that may seem terribly unfair, the next sentence is going to feel like a punch in the gut.
The same excellent credit score guy who has an active DUI on their driving record will only pay $2,052, or over $1,000 less than the guy with a perfect driving record but bad credit.
The underlying moral of this information is that you can drive like a maniac while under the influence of alcohol at a minimum risk of insurance premiums increasing much, but, if you are late on just one loan payment, you are screwed!
It makes sense for a lender to reconsider someone with a 609 credit score for an auto loan, but when a late payment hurts your insurance premium more than a DUI, something is wrong.
If you live in California, Hawaii, or Massachusetts, you can disregard this information. State legislators in these states passed laws that forbid insurance companies from determining auto premiums based on credit scores.
I know you are not going to believe this…
But, in these states, the cost of your insurance is determined by your actual driving record and annual mileage usage.
What Can You Do?
You do have some recourse if your car insurance company decides to drop you or increase your premiums based on your credit score.
In the middle of 2000s, State legislators were alarmed by what they discovered. Some insurance companies disproportionately charged their constituents based on their credit score.
Twenty-nine states passed laws to bolster their “Extraordinary life circumstances exceptions“. This allows a consumer to request that their credit score not be counted against them due to recent life trauma.
Common extraordinary life circumstances may include:
If you are unemployed
Battling an extreme illness
Identity fraud or theft
There are informal surveys that indicate a small number of people actually file for an extraordinary life circumstance waiver.
This is most likely since most people don’t know that their premium is based on their credit score.
Build Your Credit Score
The reality is that there are many credit-building tools available for anyone to improve their credit score.
Just moving up one credit scoring category can save you thousands of dollars on your car insurance.
But first, you need to find out your credit score.
There are multiple ways to obtain a free credit score including; your credit card company, your bank, with ID theft protection, or third party sites.
You can set a target credit score you’d like to reach and take the necessary steps to achieve that goal.
There are a couple of ways you can increase your credit score in just a few weeks, without much cost.
My favorite free credit booster is the ‘borrow-a-kidney’ strategy.
With this strategy, you’ll be an authorized user on a family member or friend’s credit card.
By them adding you as an authorized user, the credit card company will start reporting that history on your credit file.
If you are new to credit and have a thin credit file, the ‘borrow-a-kidney’ strategy can result in huge credit score gain, all for free.
Another great way to build credit is by going to Fingerhut and applying for credit. You can use their card for purchases on their website.
They offer a revolving credit loan that is the same as a traditional credit card. But, you can only use the credit to purchase items from Fingerhut’s online store.
I personally saw a 29 point increase to my credit score within a few days after signing up.
There are multiple ways to go about improving your credit so you can save money on your auto insurance.
Take the time to research each opportunity to find the ones that work best for you.