Q: I missed my last car insurance payment deadline by a few days, so it goes down as a late payment. It was my fault, but imagine my surprise when my car insurance was canceled and I had to open a new policy (with the same company) with much higher monthly payments. What’s up with that? — J. Dessauer, Chicago

A: It’s no secret that a late payment on any monthly payment, let alone a car insurance payment, can lead to trouble. But auto insurance penalties are particularly thorny.

It’s all about what insurance company actuaries like to call "risk factors." If an auto insurer sees a late payment, it can automatically close your policy and make you reopen it with a higher rate. If you squawk about it, all the insurer has to do is point to your credit report with the late payment recorded and say that you’re an increased credit risk.

There’s also a lot that goes into an auto insurer’s risk factor when awarding you an insurance policy. For instance, a study by Conning & Co. point out that 92 of 100 U.S. auto insurers apply credit risk data in underwriting new policies. The lower your credit rating, the higher your insurance rate (this goes for auto insurance claims, as well. Conning estimates that drivers with lousy credit file 40% more insurance claims than drivers with good credit).

Consequently, your late payment is a big credit issue with auto insurers — and they feel like they’re justified in canceling your policy and hiking your rate to open a new policy. Auto insurers are likely to raise rates to late payers by anywhere from 20% to 50%, Conning says.

Going forward, your best move is to pay the new policy on time every month, and keep your credit score as clean as possible. Also, while you’re free to move your auto insurance business to a new insurer, your best rates may actually lie with your current insurer — after all, one late payment isn’t a death knell and your current insurer will almost always welcome you back, albeit at a higher rate.

Competing insurers may see your late payment, and only agree to take you on as a customer at an even higher rate than your current insurer.

Don’t kill yourself over this one. It’s an expensive lesson to pay an auto insurance bill late, but chances are that now you know the repercussions, it likely won’t happen again.

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