How Your Credit Score Can Affect Your Car Insurance Rates

As an American, your credit plays a major role in nearly every aspect of adult life, including taking out a loan, buying a house, and– yes– getting car insurance. But what does your ability to manage debt have to do with your driving habits or the likelihood of you getting into an accident? The answer lies in how insurance companies assess risk.

For years, insurance companies have used various factors to predict how likely a policyholder is to file a claim. These factors traditionally included your driving record, the type of car you drive, your age, gender, and even your geographic location.

However, a less obvious, but equally impactful, factor that many insurers now consider is your credit-based insurance score– a unique calculation derived from the information in your credit report.

Note: These tips should not be considered official insurance guidance. Please consult an insurance professional or broker when making decisions regarding insurance.

Restrictions on Using Credit in Auto Insurance

While it’s common for your credit history to have an impact on your insurance, some states impose strict limits on how it can be used. In Maryland, Michigan, Oregon, and Utah, insurers are restricted from using your credit as a factor in certain decisions, such as whether to cancel your policy. Furthermore, in California, Hawaii, and Massachusetts, your credit shouldn’t impact your auto insurance at all.

Why Insurers Use Credit to Determine Rates

While in theory, your credit history shouldn’t have any impact on your driving habits, it can often serve as a proxy for your risk profile. Over the years, researchers have uncovered a correlation between lower credit scores and higher insurance losses. Although that doesn’t mean that having a low credit score causes accidents, it can give your carrier an idea of how much risk they’ll take on by insuring you.

From an insurer’s perspective, a higher credit-based insurance score indicates a lower risk of future claims, translating into lower premiums for you. Conversely, a lower score can signal a higher risk, leading to higher rates to offset the perceived increased likelihood of a claim payout.

How Your Credit Score Impacts Your Car Insurance Rates

As previously mentioned, your credit score doesn’t have a direct impact on your car insurance rates. But the effect of your credit-based insurance score on your premiums can be substantial.

An analysis by Bankrate grouped policyholders into four separate buckets by credit rating and calculated their average cost of full coverage:

• Poor credit: $4,696
• Average credit: $2,926
• Good credit: $2,679
• Excellent credit: $2,302

According to these findings, drivers with poor credit are paying, on average, 104% more for full coverage compared to those with excellent credit.

It’s important to note that these are averages, and they could be impacted by correlating factors outside of credit, such as age or driving history. However, given this disparity, it can still be a smart financial decision to take steps to improve your credit in order to save on insurance.

What Goes Into Your Credit-Based Insurance Score?

While similar to your standard FICO score, a credit-based insurance score is a proprietary calculation used by insurers. The exact weighting of each factor can vary by carrier, but the score is based on the same information found in your credit report, such as:

• Payment history: Do you pay your bills on time? Late payments can negatively impact your score.
• Amounts owed: How much debt do you carry compared to your credit limits? High utilization can be a red flag.
• Length of credit history: A longer history of responsible credit use is generally better.
• New credit: Opening too many new accounts in a short period can sometimes lower your score.
• Credit mix: Having a healthy mix of different types of credit, such as credit cards and student loans, can be beneficial.

Checking Your Credit-Based Insurance Score

Unlike your standard FICO score, you typically can’t directly check your credit-based insurance score. However, you can monitor the underlying data by regularly checking your full credit report from all three major credit bureaus (Equifax, Experian, and TransUnion) for free annually at AnnualCreditReport.com.

Reviewing your credit report helps you identify any errors that could be dragging down your score and gives you a clear picture of the financial information insurers are using.

Tips for Improving Your Credit Score to Save on Car Insurance

Think your credit might be dragging down your insurance options? It doesn’t have to stay that way. By taking proactive steps to improve your credit health, you can potentially lower your car insurance rates over time. Here are some actionable tips for budget-conscious drivers:

1. Pay Your Bills On Time, Every Time: This is the single most important factor in your credit score. Set up automatic payments or reminders to ensure you never miss a due date, even for small bills.
2. Reduce Your Credit Card Balances: Aim to keep your credit utilization ratio, or the amount of credit you’re using compared to your total available credit, as low as possible. Many advisors recommend aiming for below 30%. Paying down high balances can significantly boost your score.
3. Avoid Opening Too Many New Credit Accounts: While it might seem tempting to open new credit cards for introductory offers, doing so can temporarily lower your score, especially if you apply for multiple accounts in a short period. Keep an eye on timing when creating new accounts, and consider spacing them out when possible.
4. Don’t Close Old Credit Accounts: The length of your credit history positively impacts your score. Even if you’ve paid off an old credit card, keeping the account open can help maintain a longer average age of accounts.
5. Dispute Errors on Your Credit Report: Regularly check your credit reports for inaccuracies. Errors, such as accounts that aren’t yours or incorrect late payments, can negatively impact your score. If you find errors, dispute them immediately with the credit bureau.
6. Consider a Secured Credit Card or Credit Builder Loan: If you have little to no credit history or are working to rebuild poor credit, a secured credit card or a credit builder loan can be excellent tools to establish a positive payment history.

Keep in mind that improving your credit score takes time and consistent effort. Don’t expect immediate results. Small, consistent improvements in your financial habits will lead to long-term gains.

Shopping Around with a Good Credit Score

Once you’ve made strides in improving your credit score, it’s time to shop around for car insurance. Different insurance companies weigh credit scores differently, and some might offer better rates to individuals with improved credit. Don’t assume your current insurer will automatically give you the best deal just because your credit has improved.

Try using an online comparison tool to get quotes from several carriers at once. That way, you can gather multiple options and narrow them down from there.

Using Your Credit to Lower Your Insurance Rates

If you live in a state where carriers can consider driver credit history in insurance decisions, understanding the connection between your credit score and your rates is essential. While a clean driving record and a safe vehicle are important, your credit history plays a significant role in determining your premiums.

By taking steps to improve and maintain a healthy credit score, you’re not only demonstrating financial responsibility; you’re also unlocking a powerful way to save up to thousands annually on your coverage.