How Your Credit Score Affects Your Car Insurance Rate

Key Takeaway:

Your credit history is a major factor that insurance companies use to set your rates in most states. Keeping your credit healthy can save you hundreds of dollars each year on your car policy.

Do you know that your financial habits can affect what you pay for car protection? In fact, how credit score affects car insurance is one of the most surprising parts of buying a policy. If you want to keep your costs low, you need to understand how these two things work together.

What Is a Credit-Based Insurance Score?

Insurance companies do not look at your regular credit score the same way a bank does. Instead, they use your credit data to create a special credit-based insurance score. This rating helps them guess how likely you are to file a claim in the future.

They look at your payment history, how much debt you have, and how long you have had credit accounts. If you pay your bills on time, your insurance score will usually be very good. You can find more smart money management tips on our site to help build your credit up.

Why Do Insurance Companies Look at Your Credit?

Insurance companies love data and numbers. Years of research show that people with higher credit scores tend to get into fewer accidents. They also file fewer claims that cost the company money.

On the flip side, drivers with lower scores might file more claims or miss payments. Insurance groups see these drivers as a bigger risk. Because of this risk, they charge higher rates to protect themselves from losses.

How Much More Do You Pay with Poor Credit?

The price difference between good credit and bad credit can shock you. In some places, a driver with poor credit pays twice as much as a driver with excellent credit. This is true even if both drivers have clean driving records with no accidents.

Let us look at a simple table to see how much rates can change based on credit tiers. These are average yearly costs for typical drivers across the country.

States That Do Not Allow This Practice

Not every driver has to worry about this issue. A few states have banned insurance companies from using credit scores to set prices. If you live in one of these states, your rate depends only on your driving record.

Currently, California, Hawaii, Massachusetts, and Michigan do not allow credit checks for car insurance. If you live in these areas, you might want to read our guide on choosing the right car insurance policy to see what else affects your rate.

How to Improve Your Credit to Lower Your Rate

If your credit is not perfect, you do not have to pay high rates forever. You can take simple steps to boost your score and lower your bills. The most important step is to pay all your bills on time every single month.

Next, try to pay down your credit cards so you use less of your limit. Keeping your card balances below thirty percent of your total limit helps a lot. Also, avoid opening too many new accounts at the same time.

Other Factors That Decide Your Insurance Cost

Your credit score is important, but it is not the only thing that matters. Companies also look at your age, your zip code, and the type of car you drive. Your past driving history is still the biggest factor of all.

If you have tickets or accidents, your rates will go up regardless of your credit. Staying safe on the road is the best way to keep your costs down. Combined with a good credit score, you will get the absolute best deals.

Frequently Asked Questions About Credit and Insurance