If you have bad credit, be prepared to pay more than just higher interest for purchases on credit. Your car insurance premiums will likely be higher also.
Many people argue that their credit scores have nothing to do with their driving styles. They may be mostly correct by this statement, although there may be some correlation between responsible credit use and responsible driving.
This seems to be the biggest reason cited when people ask about how credit scores affect their insurance rates. There is a much more telling reason, however.
Insurance Fraud
Debt-ridden consumers will resort to extreme measures to avoid repossessions and foreclosures. Many municipalities have reported increases in arson during the past two years. The Detroit Fire Department notes a 88% increase in arson arrest warrants from 2005 to 2007. Foreclosures in Detroit increased by 65% during 2007.
Drivers also may feel the urge to destroy a vehicle in order to prevent an impending repossession. Insurance providers routinely investigate potential fraud cases including torched or even submerged vehicles.
The full extent of the problem is unknown, as it is impossible to prosecute every case of insurance fraud. Instead, fraud investigators focus on the cases they can prove.
To compensate for losses, policyholders pay more for insurance through higher premiums. Those most likely to commit insurance fraud due to their poor credit and financial status are also ordered to pay higher premiums.
Some consumers argue the higher rates are unfair. However, insurance representatives counter that actuarial tables prove that drivers with lower credit scores carry higher risk of loss. The result is that you pay more for car insurance if you have a low credit score.
If you have a low credit score, you may wish to make changes to improve your financial situation. A credit counselor can help you understand ways to improve your score.
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