Does your credit score affect car insurance?
Fact-checked with HomeInsurance.com
There are many ways to lower your auto insurance premiums: good driving behavior, purchasing a safer vehicle and bundling home and auto policies are just a few examples. But not all drivers realize the possibility of their credit scores affecting insurance premiums. As if there weren’t already enough reasons to improve your credit, doing so may also help lower your car insurance premiums.
What factors affect my auto insurance premiums?
The factors that affect auto insurance can vary by location and insurance company. However, there are a few that tend to be universal. Where and how you use your car plays a big role in the cost of insurance, as does the vehicle type. Cars that have a higher value are more expensive to insure, and vehicles that are left on the street will cost more than those parked in a secured garage. Having a longer daily commute will also send premiums upward as increased mileage means a higher chance of getting in an accident.
Auto insurers also use your details to gauge your risk as a driver. Your age and gender are both factors; younger drivers and males are more likely to have a higher rate when all other variables are equal. Driving history plays a key part as those with infractions are more likely to repeat the behavior. While a single speeding ticket might not be enough to send your premiums skyrocketing, a DUI is a much more serious offense that insurers will frown upon. In most states, your credit score can be taken into consideration by auto insurance companies as well.
Finally, the type of insurance you purchase and how much coverage you buy is the most direct way to control your insurance premium. Choosing a plan with a lower coverage limit and a higher deductible will lower your monthly bill, but there’s a huge trade-off. Sacrificing coverage for the sake of lower premiums is generally considered a poor strategy as you’ll be left high and dry financially in the event of an accident.
Overall, some combination of these factors will typically be used to determine your auto insurance premiums:
- Vehicle make and model
- Number of miles driven
- Age and gender
- Driving history
- Credit history
- Type and amount of insurance
Does my credit score affect car insurance?
|Credit tier||Full coverage||Minimum coverage|
Average rate impact by credit score
As you can see from the findings on how credit score affects car insurance, having good credit can result in vastly cheaper rates, regardless of the level of car insurance you choose to buy. The difference between good credit and poor credit based on minimum coverage is most significant; a driver with poor credit will pay almost double in premiums each year compared to someone with good credit.
Paying for full coverage when you have good credit will cost you roughly $130 per month, or $,1,555 a year. If you have average credit, the same full coverage costs around $173 per month, on average. And drivers with poor credit will pay, on average, approximately $202 per month in premiums. Based on these numbers, improving your credit score from average to good could save you around $516 per year.
In almost every state, your credit score can be used as a factor to determine your car insurance rate – and it probably will. According to NAIC, 95% of auto insurers look at your credit report in the states where this is allowed. But how exactly does credit score affect car insurance rates? This depends on a few details like your location and the individual company.
How does your credit score affect your car insurance?
If you’ve purchased a home or vehicle in the past, you may have already gone through a credit check process to determine your loan rates. The process that insurance companies use to evaluate your credit health is slightly different, according to Experian. Auto insurers use a different version of your credit score that is more accurate at predicting drivers’ risk. Still, the same basic principle applies, the better your credit score, the more of a positive impact it will have on your insurance rates.
There’s one other key difference to know about. When lenders check your credit, this inquiry shows up on your credit report and results in a nominal deduction from your score. Thankfully, the same penalty doesn’t apply when an insurance company looks at your credit score. This means getting a quote for a new policy won’t negatively impact your credit.
Why do insurance providers use your credit score?
Getting car insurance doesn’t require a loan, so why should an insurer care about your credit? To put it simply, your credit score is an indicator of your overall responsibility as a driver. Statistics show that drivers with good credit are less likely to get in an accident than those with poor credit.
“Insurers use a credit-based insurance score to understand how likely you are to have an insurance loss and file a claim,” says Laura Adams, an insurance and financial advisor. “The better your credit rating, the less risky you appear to an insurer, and the lower your premium will be.”
Is credit score a factor in all states?
In 47 states and the District of Columbia, the law allows insurers to access your credit score for the purpose of determining premiums. This doesn’t mean that insurance companies have to use the data, although most do.
“Many drivers aren’t aware that their credit affects their car insurance rates in most states,” says Adams. “Unless you live in California, Hawaii or Massachusetts, where insurers are prohibited from using credit as an auto rating factor, having good credit saves money on your premiums.”
Unless you live in one of these three states, it’s safe to assume that your credit score will be accessed by insurers when you request a quote.
If your credit score changes, should you shop for new rates?
Everyone’s credit score fluctuates throughout their lifetime. If you first signed up for auto insurance when your score had dipped and have since made improvements to your financial situation, it might be worth shopping around for a better rate. Since each insurer weighs factors differently, it’s entirely possible that you’ll get a lower quote from another company that places more emphasis on credit health.
“If your credit has improved over time, be sure to shop auto policies and compare rates,” says Adams. “If you live in a state where credit is an insurance factor, having better credit means you can probably find a better deal.”
- Your credit score can be used as a determining factor in setting your auto insurance rate in most states.
- Insurance companies are willing to give better rates to drivers with a high credit score because they’re statistically less likely to get in an accident or file a claim.
- Shopping around for quotes is the best way to get a lower insurance rate after improving your credit over time.
Unless you live in California, Hawaii or Massachusetts, you can be certain that your credit score was one of many factors used to establish your current auto insurance rate. If you’ve seen improvements to your score, there’s no harm in shopping around for auto insurance quotes, especially if it’s been a while since the last time you compared rates.