Your credit score impacts more than just your ability to get a loan—it also plays a significant role in determining your car insurance premiums. While it might seem unrelated, insurers use credit-based insurance scores to assess risk and set rates. Learn how your credit score influences your auto insurance costs and what you can do to lower them.
Why Do Insurers Look at Credit Scores?
Insurance companies view your credit score as an indicator of financial responsibility and risk. Studies show that people with lower credit scores are statistically more likely to file claims, making them a higher risk for insurers. To account for this, insurers use credit-based insurance scores to adjust premiums.
This isn’t the same as the credit score used for loans, but it’s based on similar factors, such as payment history, outstanding debt, and length of credit history.
States That Limit Credit Use in Insurance
Some states restrict or ban the use of credit scores in determining auto insurance rates. These states include:
- California
- Hawaii
- Massachusetts
- Michigan (with some restrictions)
If you live in one of these states, your credit score won’t impact your premiums. However, in most states, credit is still a significant factor.
Factors That Affect Your Credit-Based Insurance Score
Your credit-based insurance score is calculated using specific factors, including:
- Payment History: Timely payments boost your score, while late payments or collections lower it.
- Credit Utilization: Using a smaller percentage of your available credit improves your score.
- Length of Credit History: A longer history of responsible credit use works in your favor.
- Types of Credit: A mix of credit accounts, such as credit cards and loans, can help.
- New Credit Inquiries: Opening too many accounts in a short time can hurt your score.
Each insurer weighs these factors differently, but maintaining overall good credit habits is the best strategy.
How a Low Credit Score Increases Premiums
Drivers with low credit scores often pay significantly more for car insurance. For example, a driver with poor credit might pay 50–100% more than a driver with excellent credit for the same coverage. This difference can amount to hundreds of dollars annually, depending on your state and insurer.
Steps to Improve Your Credit Score for Lower Premiums
Improving your credit score can take time, but it’s one of the most effective ways to lower your auto insurance costs. Here’s how to get started:
- Pay Bills on Time: Late payments can dramatically lower your credit score. Set up reminders or autopay to ensure you never miss a due date.
- Reduce Debt: Aim to lower your credit card balances to less than 30% of your credit limit. This shows lenders—and insurers—that you’re managing your debt responsibly.
- Check Your Credit Report: Errors on your credit report can unfairly lower your score. Request a free report from AnnualCreditReport.com and dispute any inaccuracies.
- Avoid Opening New Accounts: Limit the number of new credit applications you make, as multiple inquiries can hurt your score.
- Build a Long Credit History: Keep older accounts open and in good standing to boost your score over time.
Other Ways to Lower Insurance Costs with Poor Credit
If improving your credit score isn’t an immediate option, there are still ways to reduce your premiums:
- Shop Around: Different insurers weigh credit scores differently, so you might find a better rate with another company.
- Take Advantage of Discounts: Look for safe driver, multi-policy, or low-mileage discounts to offset higher premiums.
- Consider Usage-Based Insurance: Insurers that offer telematics programs may base rates more on your driving habits than your credit score.
- Adjust Your Coverage: If necessary, consider lowering non-essential coverage, such as comprehensive or collision, to reduce costs.
Should Credit Scores Be a Factor in Insurance?
The use of credit scores in setting insurance rates is a topic of debate. Supporters argue it’s a fair and predictive measure of risk, while critics claim it unfairly penalizes people facing financial hardship. Regardless, understanding its impact can help you make better financial and insurance decisions.
How to Find Insurers That Minimize Credit Impact
Some insurance companies place less emphasis on credit scores than others. Researching these companies and asking about their rating process can help you find a provider that offers competitive rates for drivers with lower credit scores.
Key Takeaways
Your credit score can significantly affect your auto insurance premiums, but you’re not powerless to change the outcome. By improving your credit habits, shopping around, and exploring discounts, you can take control of your insurance costs. Look into these strategies today to start saving.