Many people only check their credit scores once per year. While you might be able to do so more often, a year is often what it takes to see real changes in your overall score. But, think about what else might change in a year? In many cases, your car insurance needs, not to mention your premium, might change as well. The thing is, good credit (and bad credit) can affect your premium. What can you do over a year to improve your credit?
As you work to improve your credit, you might see other benefits throughout your life. Good credit is one of the cornerstones of financial security. Therefore, it can serve a great benefit to your insurance qualifications.
Understanding Credit
Credit scores are more or less a measurement of the holder’s financial responsibility and stability. Many different companies issue credit scores to those who owe money, carry credit cards or have loans of various kinds. The higher this three-digit number, the better the reflection of the credit holder’s ability to manage their money.
Despite the fact that many companies track credit, most people scores look relatively uniform. Credit scores generally range between 300 – 850. Scores of 650 – 700 or higher generally are good credit scores.
Essentially, credit scores fluctuate based on how much credit you carry, compared to how much debt you carry. For example, among your credit cards, home loan, car loan and other lines of credit, you might have $500,000 of available credit. As you spend money on that credit, you accumulate debt, let’s say $15,000. However, as you work to pay back that $15,000 by paying your bills and settling debts, your credit will grow again.
Therefore, your credit reliability might increase the less debt you carry related to your available credit. As a result, your credit score will often increase. It will show, in essence, that you can pay your bills. To many parties, including insurers, that is a good sign.
Credit’s Impact on Insurance
When you buy a car insurance policy, you must pay for it. That is your policy’s premium. Obviously, you will want to pay as affordable a cost as possible.
The thing about premiums is that they vary considerably based on the policyholder’s risk profile. A policyholder’s risk is their likelihood of having to make a claim on their policy. The more risk a policyholder has, the more likely they are to make a claim. That means the insurer has a higher risk of having to pay. As a result, they might have to charge the policyholder more.
Credit, for many reasons, is a common factor that insurers look at when they set premiums.
Primarily, good credit shows an insurer that they can rely on you, the policyholder, to pay your premium. Therefore, you’ll face a lower risk of ever letting your policy lapse. That will equal less money lost to the insurer.
Additionally, credit might also demonstrate that you have a lower risk of having to rely on your policy to handle your losses. If you can shoulder minor costs of car upkeep and repairs without relying on your policy, then that’s less of a risk to the insurer.
Therefore, credit is an important thing to maintain if you want better chance to earn an affordable premium from the insurer.
Tracking Your Credit Over the Year
Most people renew their auto insurance premiums yearly or every six months. Between these intervals, there is time to work on your credit. If you keep your financial solvency in mind, you can improve your credit just through your everyday activities.
- Keep a close track on how much debt you carry. As you spend money on credit cards, try to keep your overall debt as low as possible. Try to pay off as much of your balances as possible each month.
- Do not skip payments. Even if you can only pay the minimum amount on a loan or credit line each period, that is better than no payment at all.
- Try to avoid opening too many lines of credit frequently. This might show that you are desperate for credit, which might harm your credit score.
- As you can, work on saving money in a savings account. That way, you’ll build a cushion, rather than simply rely on credit.
- Carefully review your loans, particularly your car loan. If you can afford to pay extra on these loans, besides the minimum required, then you likely will improve your ability to reduce your debt quickly.
- Check your credit score through a major creditor like FICO® once per year. Checking more often could sometimes cause your credit score to drop. However, in many cases, these drops are only temporary.
- If you ever notice fraudulent use of your credit cards, immediately secure the accounts. You do not want a third party stealing your money, and credit.
Credit health is often about practicality and productivity. Therefore, throughout the year, carefully track your expenses and make economies as you can, if necessary. Financial health can improve your insurability. Therefore, it will help you in a lot of ways.