Why is credit information necessary on a car insurance application?

Insurers in most states consider your credit history when setting car insurance premiums. Even if you've never filed an auto insurance claim, your premium could go up if your credit rating goes down.

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Insurance companies use information from credit reporting agencies to calculate an insurance risk score. You may think your financial habits have nothing to do with insurance, but insurers say people with solid credit are less likely to get into an accident or file a claim than people with shaky credit or no credit history.

Some consumer advocates have cried foul, saying it's unfair for insurers to use credit information as a factor in setting premiums. But the practice remains legal in most states.

What you can do

First, order copies of your credit reports from the major credit reporting bureaus. You're entitled to free copies from each of the credit bureaus once a year. Check to make sure the information is accurate. If you find mistakes on any of the reports, follow the credit bureau's instructions to dispute the information and get it corrected.

Second, do whatever you can to improve your credit. Pay your bills on time, catch up on any late credit card payments and pay down your credit card balances. Using too much of your available credit – maxing out all your credit cards – raises a red flag. If you don't have any credit history, apply for credit to show you can use it responsibly.

For more, see "My credit affects my auto insurance rate?"