How Your Credit Score Affects Your Auto Insurance Rates

March 5, 2024

Your credit score can have a significant impact on your auto insurance rates. In most states, insurers look at policyholders' credit histories as one of the factors in determining premium charges. While the exact formulas they use are proprietary, there is a strong connection between your credit score and what you end up paying for coverage.

Your credit score can have a significant impact on your auto insurance rates. In most states, insurers look at policyholders’ credit histories as one of the factors in determining premium charges. While the exact formulas they use are proprietary, there is a strong connection between your credit score and what you end up paying for coverage.

Some studies suggest that drivers with very low credit scores can sometimes pay almost double compared to those with excellent credit. The system isn’t one-size-fits-all, and other factors will also be weighed, but the correlation is significant enough that policyholders should be aware of the relationship.

In this guide, we’ll show you how your auto insurance rates might be impacted by your credit score. We’ll explain why insurers look at financial histories, review state laws that do or don’t allow the practice, discuss ways you may be able to improve a low score, and review options like Disadvantaged Auto Plans that provide alternatives for high-risk drivers and those with low credit scores.

Overall, you can end up paying surprisingly high premiums just from having poor or no credit. By understanding the connection and taking steps to improve your financial standing, you may be able to significantly reduce your auto coverage costs.

What is a Credit Score?

A credit score represents your financial responsibility by indicating how you pay your bills and debts. Also known as a FICO score, it is a three-digit number between 300-850 based on your credit history. The higher the number, the better your credit standing with potential lenders and creditors. 

This helps determine your overall creditworthiness. Banks and financial institutions use your credit score to determine the level of risk you pose in receiving a loan or credit line. Auto insurance companies use credit scores in determining your rates, as people with poor scores tend to file more claims and cost more to insure.

It includes data from the five major credit bureaus on your:

– Credit Card Payment History

– Outstanding Balances 

– Collection Accounts

– Years of Credit History

– New Credit Applications

Each bureau calculates your score differently, so it’s not unusual to have slightly different scores from each one. However, they generally provide a consistent picture of your overall level of financial responsibility.

Also, Read : What Does It Mean to Backdate Auto Insurance Policy?

How Auto Insurers Use Credit Scores 

Auto insurers use a variety of factors to calculate your insurance premium rates. This calculus aims to determine your level of risk in an objective way so that rates can be fairly determined across all customers. The final rate you pay is not simply based on one factor either for or against you, but all factors combined.

A part of that overall risk determination is your credit-based insurance score. Auto insurers have found a statistically significant correlation between your credit history and your likelihood of filing a claim. As such, those with a poor credit score may see higher premiums while those with good credit may see lower premiums. 

The exact algorithm used by insurance companies is proprietary. However, we know some of the types of information factored into your credit-based insurance score in determining your premiums:

– Late payments 

– Number of open accounts

– Total available credit 

– Debt owed 

– History of bankruptcies and court judgments

So while a lower credit score does negatively impact your premiums in most cases, it is not an automatic denial of coverage. It is simply one factor among many plugged into the final calculation of your insurance rates. Improving your credit can help to lower premiums over time.

Why Credit Scores Matter

A credit score is a way to statistically evaluate how creditworthy individuals are in a quick, standardized way. Personal credit scores act as indicators of consumers’ likelihood to file a claim. A credit score can reflect responsibility with payment history and how much existing debt people carry – two factors found to correlate with risk levels. 

Auto insurers find consumers with higher credit scores often have lower claim incidence and cost less to insure. On the other end of the spectrum, consumers with lower credit scores tend to file more claims that are more costly. By considering credit, insurers are factoring in the connection between responsible financial decisions and responsible driving behaviors. There are always exceptions, but data analyses point to noteworthy overall trends.

State Regulations on Using Credit Scores

Only three states – California, Massachusetts and Hawaii – ban insurance companies from using credit scores completely to set auto insurance rates. All other states allow insurers to use credit scores to varying degrees.

Some states limit how much credit scores can be factored into rates. For example, Maryland allows credit scores to affect rates by no more than 40%. And in Washington, credit scores can account for no more than 30% of premium calculations.

Other states allow credit scoring but require insurers to grant exceptions under certain circumstances. For instance:

– In Louisiana, drivers cannot be penalized for late payments due to natural disasters or circumstances out of their control. 

– New York requires exceptions for people who have had credit difficulties related to a medical catastrophe.  

– Oregon requires exceptions for drivers who have a clean driving history for three years.

The regulations also say that insurance companies have to tell drivers if a credit score is being used and whether it negatively impacts your rate. Understanding the laws where you live can help you know your rights.

Overall the rules vary quite a bit nationwide when it comes to using credit scores for car insurance rates. It’s important to be aware of your state’s regulations.

How Much Could Your Rates Change?

Unfortunately, having a lower credit score can significantly affect what you pay for auto insurance. Auto insurers often raise rates considerably for drivers with poorer credit. 

For example, one national study by the Federal Trade Commission found drivers with the highest credit scores were charged average rates 22% lower than those with the lowest credit scores. Another analysis by insuranceQuotes and Quadrant Information Services broke down differences by state, finding major rate differences between good and bad credit drivers, such as:

California: 61% higher rates for bad credit 

Texas: 92% higher rates for bad credit

Michigan: 134% higher rates for bad credit

So if you have excellent credit in the 800+ range, you could easily pay $500-1,000 less per year for the same auto insurance coverage as a driver with credit scores below 600 or bad marks like collections, bankruptcies or late payments. The impact varies by insurer and state regulations, but the effect is most dramatic for drivers under 25. Shopping around is highly recommended if you’ve had past credit difficulties but have improved your score recently.

Improving a Poor Credit Score

To improve your credit score and potentially save money on auto insurance:

– Pay all of your bills on time, including utilities, credit cards, loans, and cell phone payments. On-time payments can improve your payment history which makes up a large percentage of your score. Even one missed payment can negatively impact your score.

– Pay down credit card balances to below 30% of the credit limit. High balances relative to your limit can hurt your score. 

– Dispute any inaccurate negative items on your credit report. Mistakes on your report could be dragging your score down. File disputes with each of the three major credit bureaus.

– Limit new credit applications. Each application can negatively impact your score in the short term. Avoid applying for new credit unless absolutely necessary while rebuilding your score.

– Check your credit report annually for errors or fraudulent activity. 

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