Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insuranc...

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Melanie Musson is the fourth generation in her family to work in the insurance industry. She grew up with insurance talk as part of her everyday conversation and has studied to gain an in-depth knowledge of state-specific insurance laws and dynamics as well as a broad understanding of how insurance fits into every person’s life, from budgets to coverage levels. Through her years working in th...

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Reviewed by Melanie Musson
Published Insurance Expert Melanie Musson

UPDATED: Mar 13, 2020

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With the economy in its current state, people are looking to save money on everything. One area that many individuals seek to cut a budget is with car insurance. Because carrying some form of car insurance is a legal necessity, you can’t just avoid buying it; instead, you must shop for the best rates and take advantage of discounts. Making car insurance even more complicated to budget around, rates differ from one person to the next.

Unlike gym memberships or cable bills, car insurance rates are personalized to the individual who is purchasing the insurance. Insurers determine the cost of premiums based on the driver’s risk of being involved in an accident. The riskier the driver, the higher chance an insurance company will need to pay for a claim; to counteract these figures, insurance companies charge higher premiums to those deemed most likely to file claims on their policy.

The assessment of risk is very complex and takes into account several factors. Generally, when you obtain a quote from your insurance company, your information is processed through a computer program that reviews various risk factors on your policy and calculates an appropriate rate. Some factors are obvious: If you have a prior history of accidents or traffic violations, you will pay higher insurance rates than those with clean driving records. In other cases, risk factors are not as clear; rates can be affected by a person’s age, gender, where they live and even their credit score.

How does my credit correspond to my insurance risk?

There are two main reasons why car insurance companies will check your credit. First, car insurance companies use your credit score as an indicator of your dependability. For better or worse, many companies consider a customer’s credit score to reflect their overall financial health and responsibility. If you have very bad credit, your car insurance company may assume that you will have difficulty in paying your premiums or will be late in making payments.

Late payments can be catastrophic in insurance. If you allow your coverage to lapse and are involved in an accident during the lapse period, the car accident would not be covered. This can lead to coverage investigations and could ultimately result in you having to pay for a loss out of pocket. Insurance companies want to avoid this difficulty. They also want to receive premiums on a regular basis with minimal difficulty.

The other reason car insurance companies look toward your credit history is that individuals with poor credit may be most likely to file claims for small amounts of damage. If you have bad credit, you may not have much income or money set aside for emergencies. You might be tempted to file a claim for damage that’s just a few hundred dollars over your deductible, since you would have no extra money to spare.

Car insurance companies dislike handling claims for small damage if they can avoid it. You are much more likely to have your policy canceled for filing multiple small claims than a single large claim. Small claims use up an insurance company’s staffing hours for claim handlers and inspectors, making them costly to handle in large quantities.

How do I maintain low car insurance rates?

Of course, if you have damaged credit, you will be especially interested in obtaining low car insurance rates. The good news is that your credit score pays a relatively minor role in determining the cost of your insurance. If you are a good driver, your rates should remain affordable.

Making your payments regularly will help establish your reliability with your insurance company and can instill confidence with them. It will also help your credit. You may be able to purchase multiple types of insurance from a single company, allowing you to bundle your services; most companies will offer a discount to people with multiple policies, and this will further prove to show what a reliable and valuable customer you are.

You can save additional money on your car insurance by increasing the amount of your deductible, lowering the limits on your policy and taking advantage of any discounts you are qualified for. Over time, as both your driving history and credit history improve, your rates will begin to go down. Many car insurance companies also offer an incentive program for each year a policy goes without an accident.

If you aren’t sure why your rates cost what they do, or how to save money on your car insurance, you can contact your agent and discuss your policy options. He will be able to help you with obtaining discounts and finding any problem areas on your policy that can be dealt with to improve your premiums.