Yes, your credit score can affect your car insurance premiums. Typically, if you have a lower credit score, you can expect to pay more in premiums than a similar policyholder with a higher credit score.
Of course, your credit score isn’t the only thing insurance companies look at when determining your rates. You’ll also be evaluated on your driving record, where you live, your demographics, car type, and more. However, maintaining a good credit score is one way you can save money on your car insurance.
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Why Credit Scores Matter in Auto Insurance
Studies suggest that credit scores are correlated with insurance risk and are used by insurers to assess a policyholder’s financial stability. Higher credit scores are often associated with more responsible financial behavior, and that might mean fewer claims. According to insurers, this information helps determine premium rates more accurately.
Because improved credit scores may qualify you for lower rates, it’s financially beneficial to improve your score.
How Do Credit Checks Work?
Insurers run credit checks when you apply for auto insurance. The insurer will take into account your score given by the credit bureaus, which is calculated based on the following:
- Payment history
- Credit utilization
- How long you have had credit
- What types of credit you have
- How many new accounts you have
Credit-Based Insurance Scores
Specifically tailored for insurers, credit-based insurance scores are numerical assessments derived from credit information. While insurance scores are similar to traditional credit scores, they are based on factors that influence insurance risk rather than all the factors used for a standard credit score.
They take into account the following factors:
- Credit history
- Payment patterns
- Outstanding debt
- Public Records
This allows the insurers to predict the likelihood that you will file a claim. By assessing an individual’s risk profile and estimating the likelihood of claims, this tool helps insurers set more accurate premiums, enhancing the fairness of insurance pricing amongst policyholders.
Because each state regulates insurance, not all states allow credit scores to be used when rating and underwriting auto insurance. Below is a table of states and their restrictions against credit scores.
CA does not allow credit-based scores or credit history to be used for rating auto policies.
HI does not allow credit-based scores or credit history to be used for rating auto policies.
MD allows insurers to use credit scores to rate auto policies, but they can’t cancel or refuse your coverage.
MA does not allow credit-based scores or credit history to be used for rating auto policies.
MI does not allow insurers to cancel, non-renew, or reject you coverage on an auto policy.
OR does not allow insurers to refuse coverage or cancel an auto policy. They can use credit to rate, but the information they can use is limited.
UT is similar to OR; the only difference is they are specific on when an insurer can cancel or decline coverage after 60 days. Also, insurers can only use credit to give you a discount, not enforce higher rates.
WA has adopted a temporary rule due to COVID-19 that no insurer can use credit to adjust rates on your auto policy.
Any states not in this table do allow credit scores to be used when underwriting and rating auto insurance policies.
Types of Credit Inquiries
You’ll be told that an insurance company will be running a credit check when you apply for car insurance. But, you should know that there are two types of credit inquiries.
- Soft inquiries: A soft credit inquiry does not impact your credit score and is usually only used for information purposes. Insurance companies use this inquiry in the early stages of providing a quote. It’s used to check risk factors and the likelihood that you will file a claim.
- Hard inquiries: A lender typically does a hard inquiry to check your credit score and history to determine if you are financially responsible enough to repay the money you borrow. Insurance companies do not often utilize hard inquiries; when they do, it is not as impactful to your credit score as when a lender does it.
What Factors Contribute to Your Credit Score?
Credit scores are intended to measure a person’s financial responsibility and ability to manage debt. The following factors contribute to your credit score:
- Payment history
- Credit utilization
- Credit history length
- Types of credit
- New credit accounts
Your credit score can range from 300-850. Companies typically divide credit scores into the following tiers:
Lower credit scores correlate with higher insurance risk, according to insurance companies. People with better credit are often considered lower risks, which results in lower premiums, whereas those with poor credit may face higher premiums.
How Much Do Credit Scores Actually Matter?
If you live in a state that factors in credit score, improving your score can save you quite a bit of money on your car insurance. In fact, some studies indicate that people with credit in the Poor range can pay upwards of 200% more for car insurance than other consumers in their state. Improving your credit score by just one tier — for example, moving from Fair to Good — can often lower your premiums by hundreds of dollars.
However, credit scores are not the only factor when it comes to your car insurance costs. You can also save by maintaining a good driving record, shopping around for better rates, and asking your insurer about discounts you may qualify for.
How to Increase Your Credit Score
- Check your credit report regularly. Stay on top of your credit report by checking it often. You get one free report each year at annualcreditreport.com. Be sure to dispute any items that are not accurate.
- Make regular, on-time payments. Pay your bills on time every time. One late payment can hurt your credit.
- Keep a low balance. Maxing out credit cards or keeping your balance high can work against you.
- Be cautious about new accounts. Try not to open a lot of new accounts in a short period of time as hard credit inquiries can damage your score.
Your Consumer Rights
Consumers are entitled to accurate credit reports under the Fair Credit Reporting Act (FCRA). Credit reports are available for free every year. The FCRA also sets guidelines that must be followed by insurance companies when using credit information to rate your auto policy. The FCRA is beneficial to you as a consumer because it ensures fair credit reporting and accuracy so you do not get wrongly penalized.
You can report discrepancies in your report by writing to credit bureaus and providing supporting documentation. As a result, the bureaus investigate and correct any inaccuracies they find. You should also reach out to the company that provided the information to the credit bureau, such as your landlord or bank, and file a dispute with them, too.
All in All
Credit scores can significantly impact your auto insurance policy, both positively and negatively, depending on whether you have a lower or higher score. Because a lower credit score indicates the possibility of more claims, those with lower scores can expect to pay quite a bit more than someone with a higher score. A higher credit score indicates financial responsibility and a lower risk to the insurer.
You do have rights as a consumer, and it’s important you review your credit report on an annual basis to ensure there are no discrepancies working against you. Additionally, continuous work to improve your credit score by paying bills on time and keeping your debt in check can help you secure the best rates.