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Your credit score is one of the most influential factors when it comes to financial outcomes in your life. Most people know that their credit scores affect their ability to obtain a mortgage or loan. What’s more, most people understand that the interest rates they pay on loans is tied to their credit scores. However, there are even more aspects of your life that are influenced by your credit score.
In fact, your insurance premiums can be directly affected by your credit score, which means that if your score isn’t great, you’ll be paying more for your coverage.
Many insurance companies use your credit score to generate a credit-based insurance score that is then used as a factor in determining your premiums. Credit-based insurance scores and your credit score are not the same thing. Insurance scores focus on only some factors of your credit history in order to gain an indication about how you manage risk. Factors that may be used include:
- Payment history
- Amount of debt
- Length of credit history
- Recent applications for new credit
- Types of credit you have
In some states, insurance companies are limited in whether they can use credit-based insurance scores and, if so, to what extent.
While influential, credit-based insurance scores are only one factor in a company’s process of determining your premiums. Auto insurance companies, for example, could consider factors such as your location, age, the model and age of your vehicle, and how much you drive.
Improving Your Score
The easiest way to improve your credit-based insurance score is to increase your actual credit score. A healthier credit score can lead to lower premiums and put money back into your pockets. In addition, the higher your credit score, the better terms you will receive on loans and credit cards. As such, having a good credit score is helpful not only for the present, but also for your financial future.
Some steps that you should consider taking to improve your credit score include:
- Be punctual—Paying your bills on time is a key factor in maintaining or improving your credit score.
- Pay it back—Reducing the amount of overall debt that you have is a good way of improving your score.
- Keep it open—Paying off a credit card feels great, but even if you don’t owe any money, you should still keep the account open.
- Limit new debt—Keep the amount of applications you make for new credit to a minimum.
- Maintain balance—Having a wide variety of types of credit, such as a mortgage, auto loan, credit card and personal loan can contribute positively to your credit score.