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Does Credit Score Affect Car Insurance Rates?

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When you think about your credit score, your credit card and car loan come to mind as determining factors. The better your score, the more likely it is that you will get a favorable interest rate when you borrow, saving you hundreds or thousands of dollars. However, your credit score can also influence something you might not expect: your car insurance rates.

Unless you live in California, Hawaii, or Massachusetts, (states that have prohibited using credit scores to determine insurance rates) knowing how your credit score affects car insurance could do your wallet some good. Here's a look at your credit score's effect on car insurance rates, from how insurance companies calculate credit-based insurance to how to improve a credit score for lower car insurance premiums.

Why Do Car Insurance Companies Use Credit Scores?

Car insurance companies use credit scores because studies have found a correlation between credit behavior and insurance claims. A relevant study from the Federal Trade Commission determined that a credit score effectively predicts whether a consumer is likely to file claims.

Statistically, if you have a high credit score, you are less likely to file claims, and when you do, the claims tend to be less expensive. So, insurers use your credit score to assess your risk and set your premiums accordingly. Insurers see a high credit score as a sign of financial responsibility, which they believe translates to responsible driving and lower risk.

Credit-based scoring has become the norm in the insurance world. FICO says, "95% of all personal insurers now use credit-based insurance scores when evaluating an applicant's risk."

How Is a Credit-Based Insurance Score Calculated?

Insurers consider five primary credit factors in determining a credit-based insurance score: outstanding debt, length of credit history, payment history, new credit, and the different types of credit you have. Lenders use many of the same factors, although insurers might weigh these factors differently.

Car insurance's credit score impact and the factors used in scoring also differ between auto insurers. It is commonly known among most  auto insurance providers, that "Every insurer has its own proprietary way of calculating and incorporating credit-based insurance scores to set rates."

You might wonder how an auto insurer checking your credit impacts your credit score. Certain providers say these inquiries do not count against your credit score, even though they may appear on your credit report.

What States Restrict the Use of Credit Scores in Determining Insurance Rates?

California, Hawaii, and Massachusetts do not permit credit-based insurance scoring. For the rest of the country, each state has different laws regarding how an insurer can use credit scores.

For instance, in Maryland, an insurer can't use your credit score to determine your premium when you renew your policy. Similarly, a Florida insurer can't deny you coverage because you have no credit history or use your credit score as the only factor in determining coverage.

To learn more about how insurers in your state may use your credit score, you can find most states' regulations online.

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How Can Improving Your Credit Score Lower Your Car Insurance Premiums?

If you're curious about the impact your credit score may have on your auto insurance premiums, consider these figures reported by the Motley Fool regarding the annual average cost of auto insurance in 2023. For those with good to excellent credit — a score above 670 — the average yearly cost was $1,947. Those with poor credit, meanwhile, paid an average of $4,145. That's a difference of almost $2,200 per year. 

If you think your credit may be costing you more for auto insurance, here are a few steps to help you boost your score:

  • Make on-time payments: This applies to all bills, not just auto insurance premiums. Payment history is a significant credit score factor. If you commonly forget to send payments, set up reminders or automatic payments.
  • Reduce debt: Try to pay down your existing debts. Increasing the amount of available credit you have can improve your score vs. how much you owe.
  • Check your credit report for errors: Mistakes on your credit report can harm your score. Regularly check your report and dispute any inaccuracies. You can get a free copy of your report at AnnualCreditReport.com.

What Other Factors Do Insurers Use to Determine Car Insurance Rates?

While credit scores are a common factor in determining insurance rates, they are not the only one. Here are some alternatives that insurers might use:

  • Driving history: Traffic violations, accidents, and claims can significantly impact your rates. A clean driving record usually leads to lower premiums.
  • Demographic information: Age, gender, marital status, and location can all influence your insurance rates. For instance, younger drivers often have higher premiums due to their risk profile.
  • Vehicle type: Your vehicle's make, model, and year can affect your rates. Expensive or high-performance cars typically cost more to insure.
  • Mileage and usage: How much and how often you drive your vehicle can impact your rates. Lower mileage generally means lower risk, leading to lower premiums.
  • Coverage options: The type of coverage you choose, your limits, and your deductible affect your rate. A higher deductible may lower your premiums, whereas higher coverage limits will raise them.

Yes, Credit Scores Affect Car Insurance Rates

Knowing how your credit score affects car insurance rates and improving your credit score can reduce your premiums and do your wallet some good. In most states, your credit score plays some role in determining your car insurance rate, but it's not the only factor. Whether you live in a state that restricts the use of credit scores or not, maintaining a clean driving record and staying informed about factors affecting your insurance can help you secure the best possible rates.

How do you know if your auto insurer used your credit score? The FTC's Fair Credit Reporting Act requires the insurer to notify you if your credit score resulted in an adverse action. With car insurance, this would be a denial of a premium or a raised policy rate. These notices often come with your policy or policy renewal. Read over your policy carefully, as the notifications may be challenging to find. If your insurance rate jumped, perhaps it's time to work on your credit score and shop for cheaper car insurance.

Frequently Asked Questions

Does bad credit impact my insurance premium?
In short, yes. Statistically, if you have a high credit score, you are less likely to file claims, and when you do, the claims tend to be less expensive.
What is a good credit score range for affordable auto insurance?
Most common insurance carriers provide insurance to those with a minimum credit score of at least 670. At the highest level, individuals with excellent scores  (800 - 850) will generally experience significant discounts in their policies. Credit scores of 740- 799 are considered very good, and will also be subject to lowered premiums. 
How much will I save switching insurance providers?
Saving by switching carriers can vary widely by location, time of year, and your driving record. While some carriers offer a median discount of 6 - 7% for policy renewals, recent research suggests that you can save anywhere between 10 - 20% by switching to a new carrier. The best way to secure the highest savings on your policy is by shopping often and connecting with a licensed agent.