How Your Credit Score Impacts Car Insurance Rates

Car insurance companies look at many factors when determining your premiums, including your driving history, where you live, what vehicle you drive, and, in most states, your credit information.

Most drivers are aware that getting tickets or being involved in accidents can impact their auto insurance premiums. However, many are surprised to learn that their credit score can also play a role in how much they pay for car insurance.

How does your credit score affect car insurance rates? The answer is, “It depends.” While a difference of a few points on your score may not result in a huge change in your rate, a major decrease or increase in your score could have a huge impact on your auto insurance rates.

Discover answers to the question, “How does your credit score affect car insurance rates?” so that you can take advantage of savings opportunities. Improving your credit may make it easier to qualify for loans and credit cards while also reducing what you pay to insure your vehicle.

How your credit score affects car insurance rates

Auto insurers use complex formulas to calculate how much to charge a person for insurance. Many companies believe there is a strong correlation between a person’s credit history and their likelihood of filing a claim.

People with stronger credit histories may be statistically less likely to file a claim, meaning they are cheaper for a company to insure. Companies pass on some of these savings in the form of lower premiums.

In states where it’s allowed, your credit information becomes one factor among many used to calculate your premium. While your score doesn’t determine whether you’re a safe driver, it can impact how much your policy costs.

If you’ve recently missed a payment or seen your score take a hit, don’t stress about your auto insurance premium skyrocketing. Instead, work on building and maintaining a strong credit profile. Insurance companies look for patterns that suggest you are responsible.

What is a credit-based insurance score?

A credit-based insurance score isn’t the same score that lenders use when evaluating a loan application.

Insurance companies use specialized scoring models to predict the likelihood that you’ll make a claim. These models account for a variety of factors, including where you live, what you drive, how many miles you average each month or year, and your credit profile.

Insurers generally don’t see your exact FICO score. Instead, they receive a separate credit-based insurance score. That number is generated from similar data, but it won’t be the same as your traditional score.

How insurers use your credit information

Insurers don’t base your premium solely on your credit history. Instead, they combine it with numerous other factors to estimate how risky it is to insure you. If you practice good financial habits, your credit information could help you achieve a lower premium, and vice versa.

How much more you could pay with bad credit

Drivers with poor credit could pay substantially more for auto insurance than drivers with excellent credit. However, the exact difference will vary by insurer and state. There are simply too many factors at play to boil the conversation down exclusively to your credit score.

For example, a driver with excellent credit may qualify for much lower premiums than an otherwise identical driver with poor credit. On the other hand, two drivers could have very similar credit scores but have different premiums due to their driving history.

Why insurance companies use credit scores

A person’s credit profile is correlated with how risky they are to insure. Insurance companies want to tap into as much data as possible to accurately gauge risk before setting a premium or insuring a driver.

From an insurer’s perspective, your credit profile helps them price policies more accurately and offer competitive rates to lower-risk customers.

States where credit can’t be used for insurance rates

Most states allow insurance companies to use credit-based insurance scores to set premiums and determine whether to offer policies to drivers. However, seven states prohibit auto and home insurance companies from using credit-based insurance systems. Those states are:

• California
• Hawaii
• Maryland
• Massachusetts
• Michigan
• Oregon
• Utah

If you live in one of these states, your credit score does not impact your auto insurance premiums.

How to lower your car insurance rates by improving your credit

If you want to unlock lower insurance premiums and live in one of the 43 states that allow credit-based insurance scores, improving your credit profile is a great strategy.

Pay all bills on time

Your payment history is one of the biggest factors impacting your credit score. Pay your bills on time and get caught up on any delinquent or outstanding payments.

Reduce your credit utilization

Credit utilization measures what percentage of available credit you’re using. Lowering your utilization indicates that you are managing your credit well and not overburdening yourself with debt.

Check your credit report for errors

You can request one free credit report per year from each of the three major credit bureaus. Get your report and look it over to check for errors that could be hurting your score.

Build a longer credit history

Extending the age of your credit accounts can help you build a stronger financial profile over time. Keep older accounts open and use them responsibly. Don’t close an existing account unless it's absolutely necessary.

Other factors that affect car insurance rates

Auto insurance companies consider the following variables when making policy decisions and setting premiums:

• Driving record
• Previous insurance claims
• Age and driving experience
• Vehicle make and model
• Annual miles driven
• ZIP code
• Coverage limits and deductibles
• Marital status (in some states)

If you want to achieve measurable savings, try to make improvements in any of these areas under your control.

Credit score car insurance trends

Now that you’re up to speed on the latest credit-based car insurance trends, it’s time to improve your score and save some money in the process. Kikoff is a credit-building solution that includes a variety of free and paid tools, as well as educational resources to support your journey.

Do you want to improve your credit score? Sign up for a free Kikoff account and see how our tools can help.