It may seem unfair, but your credit card debt can have a direct impact on the cost of your auto insurance. Insurance companies use every tool that they can find to estimate the risk involved in providing you insurance coverage. If you have a poor credit rating because of high debt or unpaid debt, the insurance company will view that as an indication that you have trouble organizing your finances.
High Debt Equates to High Risk for Insurance Raters
Insurance companies consider several aspects of your life when they put together the rates that they charge you. Your age, where you live, how far you drive, and your gender can all affect how much money you have to pay for car insurance.
The insurance company looks for as many indications of responsibility as possible from the statistics they can gather about any driver. If you have a great deal of debt, car insurance companies will assume that you are not as responsible with your obligations as someone who has a good credit rating. An irresponsible consumer is expensive for an insurance company, so they will charge you more up front to cover any potential costs that you may cause them in the long run.
It is true that an increase in your insurance rates would actually increase your financial problems, which can add to the behaviors that the insurance company is worried about. While that may be true, car insurance companies need to make sure that they can continue to afford to cover all of your potential insurance claims.
Research Relates Spending Habits to Insurance Claims
The higher rates that insurance companies charge are not based on an insurance company’s opinion of someone with bad credit. The rates are calculated based on research that shows that individuals with poor credit ratings tend to submit more insurance claims. The factors that led you to have high debt indicate that you may be a little more reckless in your behavior. Recklessness can sometimes mean that you would make poor choices behind the wheel, which can put you at a higher risk for accidents.
Drivers who have high debt tend to be under more stress in general than drivers who have lower debt. People who drive while under heavy loads of stress are not usually as careful as those who are not worried about their financial security. Insurance companies see that high stress level as a liability to your safety as a driver. Any indication that a person has a higher risk of being involved in an accident is a reason for an insurance company to raise that person’s rates.
Why Your Debt Rating is More Important than Your Driving Record
The way you handle money may not seem to have a direct correlation with the way you drive. And truthfully, there are probably quite a few drivers with excellent records carrying uncomfortably high loads of debt. But even a good driver with high debt will still have the risk factors that come with a low credit rating. If you get a car insurance quote, the company will consider your risk based on your credit rating much like banks would consider your risk for a loan based on your credit rating.
The difference between a bank and an insurance company is that the bank researches your credit report in order to see if you have established any patterns of spending that would make you a higher risk for a loan. An insurance company, on the other hand, looks for indications that may show you are unstable or unreliable in your overall behavior patterns.
The bank wants to make sure you usually pay your bills on time, while the auto insurance company wants to make sure that you are a stable and responsible person. Stable individuals tend to demonstrate more patience and care when they approach any situation, including driving a car, which means that they will probably be involved in fewer automobile accidents.
How High Debt Impacts Your Car
Insurance companies also need to consider the impact that a low credit score can have on the type of car you drive and how well you maintain your car. If your cash flow is restricted, you may not have the financial flexibility to make sure that you change perform scheduled maintenance on safety items. You may choose to put off replacing a worn tire until it fits into your budget better.
Someone who is paying a large debt may not be able to replace bulbs as soon as they burn out. Putting off regular maintenance and repairs makes your vehicle less safe for you and others on the road, which can lead to a higher rate of accidents.
Those with a great deal of debt may be forced to drive older automobiles out of necessity. While many old vehicles operate just as well as newer vehicles, they often have fewer safety features than newer cars. Fewer safety features can translate into more serious injuries should an accident occur.
Rollover protection, side airbags and advanced safety technologies are making the roads much safer. Older cars don’t have these features, putting those in your car at a greater risk of serious injury. Medical costs associated with serious injuries are high, so insurers prefer newer, safer cars.
Lower Insurance Rates by Lowering Your Debt
The good news is that your insurance rates will go down as your credit rating goes up, once you begin to manage your finances more carefully. You can increase your credit rating by consistently paying your bills on time and refrain from opening new credit card accounts until the old ones are paid off in full.
Avoiding excessive credit card use and paying cash whenever possible can also help your credit rating improve. Good communication with the people you owe money to can help you avoid being sent to a collection agency, which would show up negatively on your credit report. Steady, stable spending habits are the key to better insurance rates.
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