Most drivers know that their driving record affects their insurance rates. Fewer realize that their credit score can have an equally significant impact. In most states, insurance companies use credit-based insurance scores to help determine premiums, and the difference between excellent and poor credit can mean hundreds of dollars per year.
Understanding this connection can motivate you to improve your credit — and save substantially on your auto insurance in the process.
What Is a Credit-Based Insurance Score?
A credit-based insurance score is different from the credit score used for lending decisions, though both are derived from your credit report. Insurance scores are designed to predict the likelihood that you’ll file an insurance claim, and studies have consistently shown a correlation between credit history and claims frequency.
Insurance scores typically consider your payment history, outstanding debt, length of credit history, pursuit of new credit, and credit mix. They don’t consider your income, employment history, or race.
How Much Does Credit Impact Your Rates?
The impact of credit on auto insurance premiums is substantial. According to various studies, drivers with poor credit pay anywhere from 40% to 100% more than drivers with excellent credit. In dollar terms, that could mean an additional $500 to $1,500 per year for the same coverage.
Some states have found the impact to be even more dramatic. A driver with poor credit might pay double or even triple what a driver with excellent credit pays, even with identical driving records, vehicles, and coverage levels.
States That Ban or Limit Credit Scoring
Not all states allow insurers to use credit in pricing decisions. California, Hawaii, Massachusetts, and Michigan have banned or severely restricted the use of credit-based insurance scores. In these states, your credit history won’t affect your auto insurance premiums.
Several other states have implemented restrictions on how credit can be used, such as prohibiting insurers from using credit as the sole factor in canceling or non-renewing a policy.
Improving Your Insurance Score
The good news is that improving your credit can directly lower your insurance premiums. Key steps include paying all bills on time, as payment history is the most important factor. Reduce credit card balances and keep utilization below 30%. Avoid opening unnecessary new credit accounts. Don’t close old credit accounts as length of history matters. And regularly check your credit report for errors and dispute any inaccuracies.
What to Do If You Have Poor Credit
If your credit isn’t where you’d like it to be, shop around aggressively. Different insurers weight credit differently, so you may find better rates with companies that place less emphasis on credit scores. Some companies specialize in serving drivers with less-than-perfect credit. Additionally, ask about discounts that can offset the impact of a low credit score.
