Does Credit Score Affect Your Car Insurance Rates?

Last Updated on December 17, 2019

Your credit score significantly impacts your car insurance premiums. A driver with good credit will pay less for car insurance than a driver with bad credit, all other things being equal.

How exactly does your credit score impact car insurance rates? What other financial information can impact insurance premiums? Can you still get good car insurance prices with bad credit?

Today, we’re explaining everything you need to know about how credit score impacts car insurance rates.

Does Credit Score Affect Your Car Insurance Rates?

Yes, Credit Scores Impact Car Insurance Rates

Insurance companies will run a credit check on each policyholder before entering into a car insurance contract.

All other things being equal, a driver with good credit will always pay less for car insurance than a driver with bad credit.

In many cases, a driver with no credit will pay twice as much for car insurance than a driver with excellent credit.

There’s a reason insurance companies consider credit score: drivers with high credit scores are less likely to make a claim. Statistics show they tend to be safer drivers. For all of these reasons and more, insurance companies are happy to offer a discount to drivers with good credit scores.

Note: Three states have banned the use of credit scores for car insurance rates. If you live in California, Hawaii, or Massachusetts, then your credit score has no impact no your premiums.

How Is Your Credit Score Calculated?

Your credit score is a calculation of your worthiness as a lender. How likely are you to repay your loan? Are you at a higher risk of defaulting on your loan? Credit bureaus like Equifax will answer these questions by looking at several factors, including:

  • The number of credit accounts you have
  • The types of accounts you have (credit card, mortgage, car loan, etc.)
  • The amount of used credit versus your available credit
  • Length of your credit history
  • Payment history

If you have had a credit card since you were 18, have always paid your bills on time, and have no debt whatsoever, then your credit score should be very good.

Alternatively, if you have maxed out multiple credit cards, defaulted on multiple loans, and declared bankruptcy in the last five years, then you will have a very poor credit score.

Why Do Insurance Companies Care About Credit?

Insurance companies care about your credit score for one simple reason: people with good credit scores tend to be less risky to insure than people with bad credit scores.

If you have bad credit, statistics say you’re more likely to get into an accident or make a claim. If you have good credit, statistics say the opposite.

The practice of using credit scores to calculate insurance premiums has been around for approximately 20 years. The practice can be traced back to two large studies from the early 2000s. A 2003 study done at the McCombs School of Business at the University of Texas at Austin and a 2007 study by the Federal Trade Commission, for example, both showed there was a statistical correlation between a customer’s credit score and how much they would cost an insurance company. The studies involved over 150,000 policyholders across the United States.

These studies also indicated that the correlation remained strong even when race, ethnicity, and income are controlled. In other words, insurance companies found a way to charge customized, accurate premiums to customers without being accused of discriminating against a specific race or class.

The insurance industry is all about managing risk. Your credit score is one of many risk factors an insurance company looks at before selling you car insurance.

What is a Credit-Based Insurance Score?

It’s important to note that insurance companies do not use the exact same credit score that a lender uses. Instead, insurance companies use something called a credit-based insurance score. This is a specific three-digit score based on your credit score.

There are minor differences between a credit-based insurance score and a credit score, but they mostly track the same information. If you have a good credit score, then you’ll have a good credit-based insurance score.

Today, most insurers use FICO’s credit-based insurance scoring system. FICO gives you an insurance score based on the following components:

  • Payment history (about 40%)
  • Total debt (about 30%)
  • Length of credit history (about 15%)
  • Applications for new credit (about 10%)
  • Mix of different credit types (about 5%)

Some insurance companies have created their own credit-based insurance score formula. Progressive, for example, has its own in-house credit-based insurance scoring system.

Other factors – like your age and marital status – are used to calculate auto insurance pricing, but they do not impact your credit-based insurance score. Your credit-based insurance score is just one of many factors used to calculate your premiums.

How Much More Will People with Bad Credit Pay for Insurance?

Someone with a bad credit score may pay significantly more for car insurance than someone with a good credit score.

If your credit score is bad enough, then you may even be rejected by multiple insurance companies. Or, the estimated premiums may be prohibitively expensive.

One study by WalletHub indicated that drivers with no credit pay 67% more for car insurance than drivers with excellent credit.

In certain states, there’s an even larger difference. Drivers in New Jersey with no credit, for example, will pay twice as much for car insurance as drivers with excellent credit.

Will Drivers with Good Credit Get Better Rates?

Yes, drivers with a good credit score will get better rates than drivers with a bad credit score, all things being equal.

However, just because you have a good credit score doesn’t mean you’re guaranteed lower insurance rates. A driver may have a worse credit score than you but a better driving history, for example. If you have three DUIs and a great credit score, then you might pay more for car insurance than someone with a clean driving record and a poor credit score.

Is It Fair that Insurance Companies Can Look at your Credit Score?

The use of credit scores in car insurance is controversial, to say the least. 48 states have taken legislative action addressing the use of credit scores in the insurance industry, and three states have banned the practice entirely.

Insurance companies consistently fight back against this criticism, however, claiming that credit-based insurance scores have created more accurate premiums for everyone: risky drivers are still paying higher rates and safe drivers are still paying lower rates.

Three States Have Banned Credit Scores from Impacting Car Insurance Premiums

Insurance companies in most states are free to use credit scores to calculate car insurance premiums. However, insurance companies in three states are legally prohibited from using credit scores for car insurance premiums:

  • California
  • Hawaii
  • Massachusetts

If you live in any of these states, then your credit score should not impact your car insurance premiums – regardless of whether you have good credit, bad credit, or no credit.

How Can I Improve My Credit Score?

There are different ways to improve your credit score. The fastest and easiest way to improve your credit score is to pay off debt as soon as possible. Here are some other tips for improving your credit score:

Pay Bills On Time: Missing bill payment deadlines will harm your credit score. Make a better effort to pay your bills on time from this point forward and your credit will improve. Rent, utilities, loan payments, phone bills, and other bills all impact your credit score.

Pay Off Debt: Obviously, you can pay off debt to improve your credit score. The less debt you have, the less risky you are as a lender. If you owe late payments or have credit card debt, then it’s crucial you pay off this debt as soon as possible.

Keep Credit Card Balances Low: If you’re the type of person who carries a large credit card balance over many months while gradually paying it off, then you’ll have a lower credit score than someone who keeps a low credit card balance. Try to pay off your credit card bill as soon as possible. Avoid carrying large balances on your credit cards or any other credit accounts.

Don’t Go Crazy with Credit Applications: Many people are surprised to find that credit applications impact credit scores. It’s true. Simply applying for credit – like requesting a new credit card or applying for a car loan at a dealership – will harm your credit rating. Only apply for credit when you really need it. Don’t go crazy with applications.

Don’t Close Unused Credit Cards: You might have five credit cards but only use three of them. Conventional wisdom would tell you to get rid of the unused credit cards. However, keeping unused credit cards is a smart strategy for improving your credit rating (as long as the cards aren’t charging annual fees). If your credit card has a minimum balance of $5,000, for example, and you close that card, then your credit utilization ratio just went up. You have $5,000 less available credit.

Dispute Inaccuracies: Your credit report might have erroneous entries. Check your credit report regularly. Someone might be using your credit and identity. Or, you may have uncorrected errors.

Wait: One of the best ways to improve your credit score is to wait. Eventually, even bankruptcy will no longer appear on your record. Credit inquiries remain on your record for two years, while most other public records (including delinquencies) stay on for seven years. A bankruptcy stays on for ten years.

By implementing the tips above, you may be able to significantly raise your credit score and enjoy lower car insurance premiums.

What Other Financial Information Can Affect My Insurance Rates?

Car insurance companies may look at other financial data to calculate insurance rates, including all of the following:

Coverage Limits, Net Worth, and Umbrella Coverage: Drivers with a higher net worth will want to have higher liability coverage limits. Many drivers will also want umbrella coverage, which extends liability up to $5 million. With these coverages, you can avoid having your assets – like your house – seized in a lawsuit resulting from a car accident. When you add more coverage to your policy, your premiums will rise.

Car Value: How much car did you buy? A high-end SUV costs more to insure than a cheap economy vehicle.

Home Ownership: Do you own a home? Homeowners tend to pay less for car insurance than renters. Statistics show they’re less risky to insure. Plus, homeowners can bundle home and auto insurance together for lower rates.

Can I Still Get Good Insurance Rates with Bad Credit?

Yes! Millions of Americans have terrible credit ratings and still pay affordable rates for car insurance.

Some companies offer particularly competitive rates to drivers with bad credit. They want drivers with bad credit in their insurance pool because it helps balance out the pool.

Other companies rely heavily on credit scores. Credit scores play a comparatively large role in calculating your insurance premiums.

According to a study by WalletHub, GEICO relies the least on credit scores: a driver with no credit will pay just 24% more for car insurance than a driver with excellent credit.

At the other end of the spectrum, Farmers relies on credit scores more than most other insurers: a driver with no credit will pay twice as much for car insurance with Farmers as a driver with excellent credit.

Progressive and Allstate were in the middle of the pack, with an average fluctuation of around 80% between drivers with no credit and drivers with excellent credit.

To find the best car insurance for your unique needs and credit score, enter your ZIP code online today. We can compare car insurance quotes from top providers across the United States.

Final Word on Credit Score and Car Insurance

Your credit score impacts multiple parts of your financial reality – from your mortgage rate to your car insurance premiums.

By improving your credit today, you can lower car insurance premiums in the future.

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