The Role of Credit Scores in Auto Insurance Premiums

When shopping for car insurance, you’re probably familiar with how factors like your driving history, the type of car you drive, and where you live affect your premiums. But there’s another important factor that many drivers might not realize has a significant impact on their rates: your credit score. While your credit score is more commonly associated with loans, credit cards, and mortgages, insurance companies also use it as a key factor in determining your auto insurance premium. In this post, we’ll explore how your credit score influences your car insurance rates, why insurers use it, and how you can improve your credit score to save on insurance.

How Does Your Credit Score Affect Auto Insurance Premiums?

Auto insurers often use a person’s credit-based insurance score to help assess risk. This is not the same as your regular credit score (which you use for loans or credit cards), but rather a specialized version that takes into account your credit history and other financial factors to predict the likelihood of you filing an insurance claim.

Generally speaking, drivers with higher credit scores are considered less risky by insurers, while those with lower scores may be viewed as more likely to file claims or experience financial difficulties that could affect their ability to maintain coverage. As a result, those with lower credit scores typically face higher auto insurance premiums.

Why Insurers Use Credit Scores:

1. Predicts Risk: Insurers base their rates on the likelihood of a policyholder filing a claim. Studies have shown that people with lower credit scores are statistically more likely to file insurance claims, which is why insurers use credit scores as a predictor of risk.
2. Financial Responsibility: A higher credit score generally indicates a history of financial responsibility. Insurers believe that people who manage their finances well are more likely to take care of their vehicles and follow traffic laws, which lowers the likelihood of accidents or claims.
3. Correlation with Claims: Numerous studies have found a correlation between lower credit scores and higher risk in auto insurance. According to the Federal Trade Commission, drivers with poor credit are more likely to have auto accidents, be involved in claims, and experience more costly repairs than drivers with higher credit scores.

How Credit Scores Are Used by Insurers

Insurance companies generally use a credit-based insurance score, which takes a variety of credit-related factors into account. These factors are then compared with other policyholders to determine where you fall on the risk spectrum. The higher your score, the less risky you are considered, and the lower your premium might be. Here’s a closer look at the factors that go into your credit-based insurance score:

1. Payment History: Timely payment of bills and debts is a major factor in determining your credit score, and it plays a similar role in your insurance score. Late payments or defaults on loans will lower your score and raise your premiums.
2. Credit Utilization: This refers to how much of your available credit you’re using. If you have high balances on credit cards or lines of credit, it suggests to insurers that you might be financially stretched, which could translate to higher premiums.
3. Length of Credit History: The longer you’ve been managing credit responsibly, the better it is for both your credit score and your insurance score. A longer credit history indicates more experience managing debt and money.
4. Types of Credit Accounts: Having a mix of credit types—such as credit cards, mortgages, and auto loans—can work in your favor. Insurers view this as a sign that you’re able to manage different financial responsibilities.
5. Recent Credit Inquiries: If you’ve applied for a lot of new credit recently, insurers may see you as a higher risk. Multiple recent inquiries can indicate that you might be under financial strain or living beyond your means.

The Impact of Credit Scores on Your Premiums

The effect of your credit score on your auto insurance premiums can vary depending on the insurer, state regulations, and other factors. On average, however, drivers with good credit tend to pay lower premiums than those with poor credit. Let’s take a look at how different credit score ranges can influence your insurance rates:

1. Excellent Credit (740 and above):

• Impact on Premiums: Drivers with excellent credit can expect to pay the lowest premiums. Insurers view these drivers as financially responsible and less likely to file claims, which reduces their overall risk.
• Premium Savings: Drivers in this category may pay up to 50% less in insurance premiums compared to those with lower credit scores.

2. Good Credit (700-739):

• Impact on Premiums: Drivers in this range still benefit from relatively low rates, though they may pay slightly more than those with excellent credit. However, the difference is often negligible.
• Premium Savings: Drivers with good credit might pay 20-30% less than those with average or poor credit.

3. Fair Credit (650-699):

• Impact on Premiums: Drivers with fair credit may see moderate premium increases. While they’re still viewed as lower risk than drivers with poor credit, they may pay more than those in the good or excellent credit ranges.
• Premium Increase: Premiums could increase by 10-20% compared to those with good or excellent credit.

4. Poor Credit (below 650):

• Impact on Premiums: Drivers with poor credit often face the highest premiums. Insurers view these drivers as higher risk, and premiums can be significantly higher as a result.
• Premium Increase: Insurance rates can be up to 50% higher for those with poor credit compared to drivers with excellent credit.

How to Improve Your Credit Score to Save on Insurance

If your credit score is affecting your car insurance rates, there are steps you can take to improve your score and lower your premiums. While improving your credit score takes time, the long-term savings on insurance can be substantial. Here are some tips to boost your credit score:

1. Pay Bills on Time

• Why It Helps: Timely payments are one of the most important factors in determining your credit score. Set up reminders or automatic payments to ensure you never miss a bill.

2. Reduce Credit Card Balances

• Why It Helps: High credit utilization—using a large percentage of your available credit—can harm your credit score. Try to keep your balances below 30% of your credit limit to improve your score.

3. Avoid Opening New Credit Accounts

• Why It Helps: Each new credit inquiry can temporarily lower your score. Only apply for credit when absolutely necessary, and try to avoid opening multiple new accounts in a short period.

4. Check Your Credit Report for Errors

• Why It Helps: Errors on your credit report, such as incorrect account information or missed payments, can drag down your score. Regularly check your report and dispute any inaccuracies.

5. Keep Old Accounts Open

• Why It Helps: The length of your credit history accounts for a portion of your credit score. Keeping older accounts open (even if you’re not using them) can help increase your credit score over time.

The Bottom Line: Credit Scores Matter for Auto Insurance

While not every state allows insurers to use credit scores to determine auto insurance premiums, many do. And even in states where it’s not allowed, insurers may use other factors that indirectly consider your financial habits. Having a good credit score can save you money on your premiums, and improving your credit score over time can lower your rates.

By understanding how credit scores impact auto insurance premiums and taking steps to maintain or improve your score, you can not only save money on your car insurance but also gain better control over your financial future. Whether you’re just starting to build your credit or already have a good score, taking care of your finances can pay off in more ways than one.