Does Credit Score Affect Car Insurance?

In certain states your credit score could affect how much you pay for car insurance.

You bought a new car and can’t wait to drive it, but you need to insure it first. With so many car insurance companies on the market, choosing the best auto insurance can seem daunting, especially if you have a low credit score.

In most states, car insurance companies use credit-based insurance scores, which means your credit score can impact your car insurance premium. In general, drivers with excellent credit pay the lowest rates, whereas drivers with poor credit pay the highest rates.

Fortunately, it’s possible to get more affordable car insurance with a low credit score. In this article, we’ll explain how credit impacts the cost of car insurance, and how improving your credit score can help you save money.

Credit Scores and Car Insurance: How Do They Work?

If you’re shopping for car insurance, it’s important to understand that your credit score will probably affect your premium. Here’s a quick look at the connection between credit and car insurance.

Understanding Your Credit Score

A FICO credit score is a three-digit number that reflects your credit behavior, indicating how likely you are to pay off debts and settle your bills on time. Scores range on a scale of poor to excellent, from 300 to 850. Creditors and lenders use your credit score to assess your credit risk and determine whether you qualify for a loan or a credit card.

Major credit bureaus calculate your score by considering your credit history length, payment history, outstanding debt, and credit account types. They also assess how much credit you have versus the amount you’ve used. For example, if you have two credit cards with a credit limit of $2,500 each, you have a total of $5,000 worth of credit. If you’ve only used $500 of the total amount and paid off your balance every month, you have a good standing with your credit.

Lastly, the credit bureau looks at the number of hard inquiries or credit requests on your account. These indicate how many times you’ve asked for new lines of credit. If the requests exist over a short period, they may negatively impact your credit score. A higher credit score may increase your chances of getting loan approval or better insurance rates.

How Does Car Insurance Work?

Car insurance protects you and your vehicle in case of an auto accident, natural disaster, or theft. The protection is typically financial, offering to pay for damages you caused or necessary repairs. Insurance policies may also cover lost wages and medical bills if you get hurt in a collision, or replace your vehicle if it’s a total loss.

Most states require car insurance by law and have minimum coverage requirements. For example, most states require minimum bodily injury and property damage liability coverage to protect others if you cause a car accident. Check with your local DMV to ensure you have the right coverage that meets your state’s legal requirements.

Do Credit Scores Affect Car Insurance Premiums?

In almost every state, car insurance companies can use your credit score as an insurance rating factor. Even if you have a perfect driving record, a poor credit score can still lead to higher insurance premiums. Here are some common questions around car insurance and credit scores:

How Do Insurance Providers Use Credit Scores?

Unlike the typical FICO credit score used for credit cards and loans, auto insurance providers use a credit-based insurance score, which reflects how likely you are to make a claim. This score helps them determine how much to charge you for insurance.

Basing your insurance premium on your credit score is legal on a federal level. However, not all states can use credit-based insurance scores. States such as California, Hawaii, Michigan, and Massachusetts prohibit insurance carriers from using your credit score against you. If you live in these states, you may be able to secure more favorable rates despite your score.

Why Do Insurance Providers Use Your Credit Score?

Insurance providers use a credit-based score to assess the risk they would assume by insuring you and your vehicle. A low score may imply that a person is at a higher risk of filing an insurance claim, costing the insurer more money. Still, it’s not the best way to determine your risk since accidents and other losses are mostly unpredictable.

Because of this unfair advantage, some insurers avoid using credit checks to calculate your monthly premium rate. Consider shopping around for car insurance quotes to find an optimal rate that suits your budget and credit history.

What Do Insurance Providers Consider a Bad Credit Score?

The number that determines a good or bad credit score usually varies by insurance company. According to Equifax, a good credit score is 670 or above. A bad or poor score is 579 or below. Ask the insurance agent about their credit scoring model when shopping for quotes. They can give you an idea of your financial standing based on their rating scale.

How Does a Poor Credit Score Affect Your Rate?

Because auto insurance companies use credit scores differently, some might charge you a higher rate if you have a low credit score. Some companies use a credit-based insurance score to determine a new premium every year during your renewal, while others may check it occasionally. Still, certain insurers might not include your score when calculating your premium.

Additional Factors That Affect Car Insurance Rates

In addition to a credit-based insurance score, car insurance companies may use the following factors to determine how much you’ll pay each month:

  • Personal information: This includes your age, gender, and marital status.
  • Driving history: Insurers look into your driving history and take note of any car accidents, traffic violations, and speeding tickets you have, or verify how long you’ve been driving.
  • ZIP codes: Your location will affect your premium rate.
  • Vehicle information: This includes your vehicle’s age, make and model, and mileage.
  • Insurance coverage type: Your premium rate will vary depending on the type of insurance you need, such as full coverage vs. the state minimum.

Similar to credit-based scores, some states don’t allow auto insurance companies to use your personal information against you. These laws protect drivers from upcharges or denials to ensure everyone receives fair treatment.

How to Find Your Credit Score

Before you start shopping for car insurance, it’s a good idea to find out your credit score. This will help you understand what type of rate you might qualify for. The Annual Credit Report website offers a free credit report to consumers. Be sure to assess the information in your report to ensure its accuracy.

If your score is low, you can use your credit report to identify areas where you can make improvements. Check back every 12 months to see if your score has improved. If it has, you can try to get a lower insurance premium when your policy is up for renewal.

Helpful Tips to Improve Your Credit Score

Don’t worry if your credit score is lower than expected. You can make some changes to your financial habits to improve it. Doing so can increase your loan approval chances and potentially reduce your insurance rates.

Pay Your Monthly Bills on Time

Late payments can stay on your credit report for several years, negatively impacting your score. Prove your financial responsibility by showing you can make consistent monthly payments over time. The easiest way to do this is to set up automatic monthly payments to make sure you don’t miss them. If you miss a payment, contact your creditor or lender as soon as possible to correct the mistake.

Diversify Your Credit Accounts

The more credit accounts you have, the better your score will be. If you only have one credit card, your score is probably stuck at a fair rating, even if you pay the balance off each month. Consider getting a small loan or adding more credit cards into the mix to improve your score.

Pay Off Your Full Balance

Credit utilization can significantly impact your credit score. Keeping several credit cards with high balances can lower your score. Try to pay off your full balance every month or aim for the highest payment possible to get out of debt sooner. If you can’t afford to settle the full amount, at least keep your balance low. You can try lowering your balance by making several payments throughout the month rather than paying in one big chunk.

Dispute Errors on Your Credit Report

If you find errors on your credit report, you can file a dispute with a credit bureau to review them. For instance, if you recently paid off a credit card, but it’s still showing up on your report, you should contact your financial institution to see how long it takes for this debt to clear. It may take up to 30 days for the balance to disappear. If the debt remains, you can submit documentation to the credit bureau along with your dispute.

Get a Higher Credit Limit

When you raise your credit limit, your outstanding balance stays the same, and your overall credit utilization decreases. If your income recently increased or your credit matured, request a credit limit raise from your creditor. Lowering your credit utilization can help improve your credit score, which may help you get a better car insurance rate.

Reach a Settlement Amount with Collection Agencies

Large debts may go to collection agencies, which will continuously report them until you pay them off. However, some agencies may settle for a lower amount if you pay in full. Work with collection agencies to eliminate your debts by agreeing to a payoff amount. Once you settle your debts, they get erased from your report, increasing your credit score.

Can You Get Auto Insurance without a Credit Score?

It’s possible to avoid car insurance that uses your credit score to determine your premium. Opt for usage-based auto insurance as an alternative. For example, consider a pay-per-mile policy that only bases your premium on the number of miles you drive each month. This policy may be favorable for young drivers or students who are on a budget and don’t rely heavily on their vehicles.

Another car insurance alternative is a telematics policy such as Root Insurance. This insurance type relies on technology to determine your monthly premium. It uses a device connected to your vehicle to monitor your rate of acceleration and braking and determine how safe your driving habits are. It also collects information about what time of day you do most of your driving.

More Ways to Lower Your Car Insurance Premium

If you’re still struggling to afford your monthly car insurance payments, there are several things you can do. It may be time to choose a cheaper car to insure, which can reduce your premium.

Also, contact your insurance provider to see if they offer discounts. You can often get savings for safe drivers, good students, bundling policies, taking a defensive driver course, and insuring multiple vehicles on the same policy.

You can also see if there are any coverages you can drop or deductibles you can raise. Either option can help lower an expensive car insurance premium.

Getting a good deal on your car insurance can be challenging if you had bad credit. Luckily, improving your credit score can help you get a much better rate. You might also find an insurance provider that does not use credit-based insurance scores to determine your premium. Optimize your monthly budget by shopping for the best insurance rate from a reputable auto insurance company.

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