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How Credit Score Impacts Your Car Insurance Premium? Research Team | Posted On Wednesday, May 22,2019, 05:26 PM

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How Credit Score Impacts Your Car Insurance Premium?



What is a Credit-Based Insurance Score?

A Credit score is the 3-digit summary of your creditworthiness. A Credit score shows responsibility in managing debt. A credit report is the detailed breakdown of your credit history prepared by the credit bureau like CIBIL or Experian.

The credit score ranges from 300 to 900. The insurance companies consider repayment history and timely payment of EMIs, late payments and so on, to determine policy premium.

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How Credit Score Impacts Your Car Insurance Premium?

Surveys have proved that car insurance companies consider the credit score as an important aspect to determine premium rates. A low credit score results in higher insurance premium and a high credit score results in a lower insurance premium. Different insurance companies have different methods of interpreting the credit scores.

These companies do not consider factors like income, personal information or job history for calculating the premiums. However, reports prove that people with better credit scores pay less insurance premium and people with low credit scores pay higher insurance premiums on their car insurance plans.

SEE ALSO: Zero Depreciation Car Insurance

Why Do Insurance Companies Check Credit Scores?

Insurance companies check credit scores to understand the trends followed in managing and paying off debt. With this, insurers are able to assess the likelihood of a claim being filed. The credit history of a person shows how responsible a person is while managing debt and whether or not he/she will pay insurance premiums in time. Credit score is an important factor as the insurer will have to bear more liability if a person has a bad credit score.

How Credit Score is Calculated by Insurance Companies?

You must keep one thing in mind that car insurers do not use your actual credit score, while determining premiums. They have their own methods of calculation to create their own scores. These companies include information from your credit report along with other information to ensure the lender has the ability to pay insurance premiums on time. It also enables an insurance company understand the probability of a claim being filed.

How to Improve Credit Score?

The Credit score reflects the history of repayments towards loans/credit cards, made over a period of time. So, it is inevitable that a credit score is built over time and there are no short-cuts to fixing it. A credit score also reflects the creditworthiness of a person. Building a good credit score takes time and depends on how you manage your debts and loans. Listed below are some useful tips that can help you enjoy a good credit score:

  • Clear Your Debts on Time: A person having a good credit score always pays his credit card dues and loan EMIs on time. Any late payments or defaults can badly affect your credit score. Pay all your dues on time or in advance, to enjoy a good credit score.
  • Make Sure to Check Your Credit Score Regularly: Stay updated on your credit score. Check credit score and credit report absolutely free at Checking credit score regularly helps make better financial decisions and identify discrepancies in your credit report. Online credit reports are soft credit checks (soft enquiries) which don’t impact your credit score.
  • Make Sure Not to Apply for Multiple Loans at One Time:  The CIBIL enquiries made by banks and financial institutions are hard enquiries, which negatively impact your credit score. Applying for too many loans at once leads to hard enquiries, which lower credit score by 5-10 points.
  • Avoid Utilizing a Credit Card to the Maximum Limit: The credit utilization ratio is the limit up to which you can spend with a credit card. It is advisable to keep your credit utilization ratio under 30%. Make sure your monthly credit bill is paid on time and does not exceed 50% of your credit limit.

SEE ALSO: IDV for Car Insurance in India

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