When shopping for car insurance, many people focus on factors like driving record, age, or the type of vehicle. However, one often overlooked but important factor is your credit score. In many states across the USA, insurers use credit-based insurance scores to determine how much you’ll pay for coverage. But why does your credit score matter when you’re insuring a car? How does it influence your premium?
This article explores in detail how your credit score affects your car insurance premiums, why insurers use it, what components matter, and how to improve your score to lower your insurance costs.
What Is a Credit Score?
A credit score is a three-digit number ranging from 300 to 850 that represents your creditworthiness. It’s calculated using various aspects of your financial behavior, including your payment history, credit usage, and length of credit history. The higher the score, the more responsible you are considered with money.
There are different types of credit scores, but the most common is the FICO score. Lenders and insurance companies use this score to assess how likely you are to pay bills on time or to file an insurance claim.
What Is a Credit-Based Insurance Score?
A credit-based insurance score is similar to a regular credit score but specifically tailored for the insurance industry. While it uses similar data, it weighs certain factors differently.
Insurance companies believe that there is a strong correlation between credit behavior and the likelihood of filing a claim. People with higher credit-based insurance scores are statistically less likely to file claims and are considered lower risk.
Important: Not all states allow credit to be used when calculating insurance premiums. States like California, Hawaii, Massachusetts, and Michigan restrict or prohibit this practice.
Why Do Insurance Companies Use Credit Scores?
Insurance is all about risk assessment. Insurers use every legal and available tool to predict which customers are likely to cost them more money in claims. Credit scores are seen as a predictor of risk for the following reasons:
-
Statistical Correlation: Studies have shown that people with poor credit are more likely to file claims.
-
Financial Responsibility: A low credit score may signal financial stress, which could lead to more reckless behavior or delayed premium payments.
-
Claims Management: Insurers use credit data to decide not only the pricing of policies but sometimes also claim handling or policy renewals.
How Your Credit Score Impacts Your Premium
A poor credit score can significantly increase your auto insurance premiums, even if you have a clean driving record. Here’s how different credit score levels typically influence car insurance costs:
-
Excellent Credit (750–850): Lowest premiums offered.
-
Good Credit (700–749): Low premiums with favorable terms.
-
Fair Credit (650–699): Moderate premiums.
-
Poor Credit (600–649): Higher premiums.
-
Very Poor Credit (300–599): Significantly higher premiums—sometimes double or triple compared to those with excellent credit.
For example, a driver with excellent credit may pay $1,200 per year for car insurance, while a driver with poor credit but identical driving history might pay $2,400 or more.
Which Credit Factors Do Insurers Consider?
Insurers typically look at a credit-based insurance score, which includes:
1. Payment History: Timely payments improve your score. Missed or late payments lower it.
2. Credit Utilization: This is the amount of credit you’re using compared to your total available credit. Lower utilization shows better money management.
3. Credit History Length: A longer credit history shows financial stability and consistency.
4. Types of Credit: Having a mix of credit types (e.g., credit cards, loans, mortgages) demonstrates experience with various forms of credit.
5. New Credit Applications: Applying for multiple new credit accounts in a short time can be a red flag.
Note that your actual income or employment status is not part of the credit-based insurance score.
How to Check If Your Credit Score Is Affecting Your Premium
If you feel like your premiums are too high, and you suspect your credit may be a factor, here are a few steps you can take:
1. Ask the Insurance Company
You can ask if your credit was used in determining your premium. They are required by law to disclose this if you inquire.
2. Request an Explanation
If your score negatively impacted your premium, you have the right to receive an explanation or “adverse action notice” describing which part of your credit file affected your rate.
3. Compare Quotes
Different insurers use different scoring models. It’s worth shopping around and getting multiple quotes, especially if your credit score isn’t perfect.
How to Improve Your Credit Score and Lower Your Premiums
Improving your credit score is one of the most effective ways to reduce your car insurance costs over time. Here’s how you can improve your credit score:
Pay Bills on Time
Your payment history is the biggest factor affecting your credit. Always pay your bills before the due date.
Reduce Credit Card Balances
Try to use less than 30% of your available credit. Lower credit utilization leads to a better score.
Don’t Open Too Many Accounts
Multiple hard inquiries in a short time can lower your score. Only apply for new credit when necessary.
Check Your Credit Report for Errors
Sometimes mistakes on your credit report can unfairly damage your score. You’re entitled to a free credit report from the three major bureaus once a year via AnnualCreditReport.com.
Build a Long Credit History
Keep older credit accounts open if they’re in good standing. A longer history increases your score over time.
By following these tips, you can gradually raise your credit score and qualify for better insurance premiums.
Alternatives if You Have Poor Credit
If your credit is currently low, but you still want to find affordable car insurance, consider the following options:
Usage-Based Insurance (UBI)
Some insurers offer UBI programs where your rate is based on driving habits rather than credit. Safe driving behaviors like smooth braking and low mileage can earn discounts.
State Programs
Certain states have programs for low-income or high-risk drivers, offering reduced insurance rates.
Bundling Discounts
Combine your auto insurance with other policies like homeowners or renters insurance to get a lower combined rate.
Increase Your Deductible
Opting for a higher deductible can lower your premium. Just make sure you can afford to pay it in case of a claim.
Shop Around Regularly
Your credit score may improve over time. Don’t stick with a high-premium insurer—keep checking for better deals at least once a year.
Your credit score can have a substantial impact on your car insurance premiums. While it may seem unrelated to driving, insurers use it as a way to measure financial responsibility and risk. A good credit score can help you save hundreds or even thousands of dollars annually on car insurance.
Understanding how your credit score is calculated, how it influences your rates, and how to improve it gives you the power to make smarter financial and insurance decisions. If your credit score is not where you’d like it to be, don’t worry—it can be improved with consistent effort and financial discipline. In the meantime, shop smart, compare options, and use available discounts to find the best car insurance coverage at an affordable rate.