Enhancing Credit Scores: The Auto Insurance Advantage

Improving your credit score can help you get better insurance rates and save you hundreds of dollars per year. While a few states, such as California, Hawaii, Massachusetts, and Michigan, prohibit insurance companies from using credit scores to determine insurance rates, most states allow it. A higher credit score generally leads to lower insurance rates. Improving your credit score can be done in several ways, such as paying your bills on time, decreasing your credit utilization rate, and checking your credit report for any inaccuracies.

Pay bills on time

Paying your bills on time is one of the most important factors in improving and maintaining a good credit score. This is because your payment history typically makes up 35% of your credit score calculation. Late payments or credit delinquencies can signal to insurers that you may be a potential risk in financial management, indicating a higher likelihood of submitting claims for minor damages. By consistently paying your bills on or before their due dates, you can positively impact your credit and, consequently, your insurance scores.

While paying your auto insurance bills on time is essential, it's also crucial to understand that simply paying your auto insurance premiums will not directly improve your credit score. Auto insurance companies do not report payment histories to credit rating agencies, so your timely payments will not be factored into your credit score. However, late payments or non-payment of auto insurance premiums can lead to other issues. If you fall into significant arrears or don't pay your bill at all, the insurance company may initiate debt collection activities, which could be reported to credit bureaus and negatively impact your credit score.

To improve your credit score by paying your auto insurance bills on time, consider using a credit card to make your payments. Using a credit card for your auto insurance payments adds to your monthly credit card balance. By consistently paying down your credit card balance each month, you can improve your credit score over time. It's important to note that making late credit card payments can result in high-interest charges, typically around 20%, so ensure you make timely payments.

In addition to paying your auto insurance bills on time, there are other strategies you can employ to improve your credit score. These include keeping hard credit inquiries to a minimum, regularly monitoring your credit score, maintaining old lines of credit, and being mindful of your credit utilisation ratio. By combining these strategies with timely bill payments, you can work towards enhancing your credit score and, as a result, potentially lowering your auto insurance rates.

Keep credit inquiries to a minimum

Credit inquiries can be divided into two types: hard and soft inquiries. Hard inquiries occur when someone checks your credit while evaluating you for a loan, credit card, or other debt. Soft inquiries, on the other hand, are made for informational purposes, such as when you check your own credit report or when an employer pulls your credit report for a background check.

Hard inquiries are the only type that impacts your credit score. They account for around 10% of your score and can indicate how well you are managing your existing debt. Lenders may see multiple credit applications in a short period as a sign that you are not in a good financial situation.

To keep credit inquiries to a minimum, only apply for credit when you need it. Do your research on loans and other offers to ensure you have a good chance of being approved. If you are shopping for a mortgage or car loan, try to make all your applications within two weeks. This is because, in certain situations, multiple hard inquiries of the same type within a given time frame are treated as one for credit scoring purposes. FICO models treat those made within 45 days as one, while VantageScore models group those made within 14 days as one.

You can also check your credit report regularly and dispute any hard inquiries that don't make sense. If you didn't approve the inquiry, the credit bureau typically has to remove it if the entity that made the inquiry can't prove you approved it.

Monitor your score

Monitoring your credit score is an effective way to improve your financial health and ensure you're on the right track. Here are some detailed steps to help you monitor your credit score:

Understand the Importance of Credit Monitoring:

Credit monitoring allows you to track the activity on your credit report. You can receive alerts for any changes, suspicious activities, or errors. This helps you identify potential signs of identity theft and dispute any inaccuracies in your credit reports. While credit monitoring is beneficial, it's important to note that it doesn't offer full protection against fraud.

Choose a Credit Monitoring Service:

You can opt for a free credit monitoring service, such as Experian, or consider upgrading to a paid plan. Paid plans often include additional features like monitoring your credit report from all three major bureaus (Equifax, Experian, and TransUnion), locking your credit report, scanning the dark web for your personal data, and providing identity theft insurance. Choose a service that suits your needs and budget.

Set Up Customized Alerts:

Customize your alerts to notify you about new inquiries, account openings, and changes to your personal information. This helps you stay proactive and address any potential issues promptly.

Monitor Your Spending and Credit Utilization:

Keep track of your spending habits and credit utilization ratio. This will help you manage your finances effectively and ensure you're not exceeding a healthy credit utilization ratio, which is ideally below 30%.

Regularly Check Your Credit Reports:

Review your credit reports from Equifax, Experian, and TransUnion at least once a quarter, but ideally once a month. You can access these reports for free at www.annualcreditreport.com. This helps you identify any discrepancies, errors, or suspicious activities that may impact your credit score.

Dispute Inaccuracies:

If you find any inaccurate or incomplete information on your credit reports, take action. Contact the lender or creditor responsible and file a dispute with the relevant credit bureau. This ensures that your credit reports accurately reflect your credit history.

By following these steps, you can effectively monitor your credit score and take control of your financial health. Remember, improving your credit score takes time and consistency, but it's worth the effort to unlock better financial opportunities.

Maintain old lines of credit

Maintaining old lines of credit can be highly beneficial for your credit score. The age of your credit history is a significant factor in determining your overall score, accounting for 15% of your FICO score. Older credit accounts indicate established lines of credit, which lenders prefer to see.

Therefore, it is advisable to keep your oldest credit accounts open, even if you no longer use them. Closing these accounts can shorten the overall length of your credit history and negatively impact your score. Instead, consider using your oldest credit card occasionally or putting a small recurring bill on it to keep it active. This will help maintain your credit history and demonstrate your ability to manage credit responsibly over an extended period.

If you no longer wish to use a particular card, check with your card issuer to see if you can upgrade or downgrade to a more suitable option. This way, you can retain the positive credit history associated with the account while switching to a card that better suits your current needs.

Remember, the age of your credit history is just one aspect of your credit score. Other factors, such as payment history, credit utilization rate, credit mix, and new credit applications, also play a role in determining your overall credit score.

Be aware of your credit utilisation ratio

Improving your credit score is an important aspect of managing your financial health. Achieving a higher credit score can unlock benefits such as loan approvals, more favourable interest rates, and increased credit limits. One of the key factors that influence your credit score is your credit utilisation ratio, which is the percentage of your available credit that you're using.

Your credit utilisation ratio is calculated by dividing the total balance of your revolving credit accounts (such as credit cards, personal lines of credit, and home equity lines of credit) by the total credit limit and then multiplying by 100. For example, if you have two credit cards with a credit limit of $5,000 each, and you have a balance of $5,000 on one card and $0 on the other, your overall utilisation rate is 50%.

In general, a lower utilisation rate is better for your credit score. While there is no specific point at which your utilisation rate goes from good to bad, it is recommended to keep your utilisation below 30%. According to Experian, the average overall credit utilisation in the US was 28% in the third quarter of 2022. However, when broken down by credit score groups, those with the highest scores tend to have credit utilisation rates in the low single digits.

It's important to note that a utilisation rate of 0% is not ideal, as credit scoring models need some usage data to calculate your score. A low utilisation rate, on the other hand, indicates that you are using your credit responsibly and repaying your balances on time.

To improve your credit utilisation ratio, you can:

• Pay down your credit card balances early: Credit card issuers typically report account balances to credit bureaus at the end of each statement period. By making payments before the end of the statement period, you can lower the reported balance and, consequently, your utilisation rate.
• Ask for a higher credit limit: If you've been using your card for a while and have a good payment history, you can request a higher credit limit. This will increase your overall available credit and lower your utilisation rate.
• Keep your reported income updated: Credit card issuers may increase your credit limit when your income rises, so make sure to update your annual income in your online account.
• Use an instalment loan to consolidate revolving debt: Consider using a personal loan or home equity loan to consolidate credit card debt or other revolving debt. This can lower your utilisation rate and provide the benefit of a fixed interest rate and set repayment period.
• Open a new line of credit: Getting a new credit card or line of credit will increase your overall available credit and may offer intro bonuses and perks. However, be cautious about opening new accounts solely for this purpose.
• Don't close your credit cards: Closing a credit card will decrease your overall available credit and increase your utilisation rate. If you're concerned about overspending, consider switching to a card without an annual fee instead of closing the account.

Frequently asked questions