When shopping for auto insurance, you might be surprised to learn that your credit score can play a significant role in determining your premium. Insurers use credit-based insurance scores to assess how likely you are to file a claim, and this can directly impact the cost of your policy.
In this blog, we’ll explore how your credit score affects auto insurance rates, why insurers consider it, and what you can do to manage its impact.
What Is a Credit-Based Insurance Score?
A credit-based insurance score is a number derived from your credit report, similar to a standard credit score. However, it’s specifically designed to predict the likelihood of filing an insurance claim rather than assessing your creditworthiness for loans or credit cards.
This score is calculated using factors from your credit history, including:
- Payment history.
- Outstanding debt.
- Length of credit history.
- Types of credit accounts.
- Recent credit inquiries.
It’s important to note that this is not the same as your FICO score, but many of the factors overlap.
Why Do Insurers Use Credit Scores?
Insurance companies use credit-based scores because studies show a correlation between credit history and the likelihood of filing a claim. Drivers with lower credit scores are statistically more likely to file claims, and their claims may be costlier.
By factoring in credit scores, insurers aim to assess risk more accurately and set premiums that reflect the likelihood of claims.
How Your Credit Score Affects Auto Insurance Rates
1. Higher Scores Mean Lower Rates
Drivers with excellent credit scores often qualify for lower premiums. Insurers view them as lower-risk customers who are less likely to file claims.
2. Lower Scores Mean Higher Rates
If you have poor or limited credit, insurers may charge higher premiums to offset the perceived risk. The difference in rates between good and poor credit scores can be substantial—sometimes hundreds of dollars annually.
3. Other Factors Still Matter
While credit scores are important, they’re just one of many factors insurers use to calculate premiums. Other considerations include:
- Driving history (accidents, tickets, violations).
- Age and experience.
- Location (urban areas often have higher rates).
- Vehicle type and usage.
States That Limit the Use of Credit Scores
Some states have restrictions or bans on using credit scores to calculate auto insurance rates. These include:
- California, Hawaii, Massachusetts: Prohibit the use of credit scores in determining auto insurance premiums.
- Other States: May have partial restrictions or require additional disclosures.
Check with your state’s insurance department to understand the rules where you live.
How to Improve Your Credit Score and Lower Insurance Rates
Improving your credit score can benefit not only your ability to secure loans but also your auto insurance rates. Here are actionable steps to boost your score:
1. Pay Bills on Time
Payment history is one of the most critical factors in your credit score. Consistently paying bills on time helps build a positive history.
2. Reduce Outstanding Debt
Lowering your credit card balances and paying off loans can improve your credit utilization ratio, a key component of your score.
3. Avoid Opening Too Many Accounts
Each new credit inquiry can temporarily lower your score. Limit new applications unless necessary.
4. Keep Old Accounts Open
The length of your credit history matters. Keep older accounts open to maintain a longer credit history.
5. Regularly Monitor Your Credit Report
Check your credit report for errors or fraudulent activity that could negatively impact your score. Dispute inaccuracies promptly.
What to Do If You Have a Low Credit Score
If your credit score is less than stellar, there are still ways to save on auto insurance:
1. Shop Around
Different insurers weigh credit scores differently. Comparing quotes from multiple companies can help you find the best rate.
2. Bundle Policies
Combining auto insurance with other policies, such as homeowners or renters insurance, can lead to discounts.
3. Look for Usage-Based Insurance
Some insurers offer usage-based insurance programs that track your driving habits and reward safe driving, potentially reducing the impact of your credit score.
4. Maintain a Clean Driving Record
A history of safe driving can offset the effect of a low credit score by demonstrating you’re a responsible driver.
Myths About Credit Scores and Auto Insurance
1. Checking Your Credit Hurts Your Score
Checking your own credit report is considered a “soft inquiry” and does not impact your score.
2. Insurers See Your Full Credit Report
Insurance companies do not view your full credit report or FICO score. They use a credit-based insurance score tailored for risk assessment.
3. Credit Scores Are the Only Factor
While important, credit scores are just one of several factors that insurers use to determine your rates.
The Bottom Line
Your credit score can significantly influence your auto insurance rates, but it’s just one piece of the puzzle. Maintaining a strong credit history, shopping around, and exploring discounts can help you secure a more affordable policy.
If you’re unsure how your credit score impacts your rates or how to find the best coverage for your situation, consider working with an independent insurance agent. They can help you navigate your options and find a policy that balances cost and coverage, regardless of your credit score.
Disclaimer: The information provided in this article is for educational purposes only. It is important to consult with a qualified insurance professional for advice tailored to your specific circumstances.