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Does Credit Score Affect Car Insurance Rates?

Jason Metz

A good credit score is important as it will impact car loans, mortgage loans, large purchases, and more. The better the score, the more likely you are to lock down low interest rates. Yet, you may wonder – does your credit affect your car insurance premium?

The answer is: Yes.

Unless you live in California, Hawaii or Massachusetts, states which have prohibited the practice of using credit in setting rates, your credit likely plays a role in how much you pay for car insurance.

A credit score is a numerical expression to represent your credit worthiness. Financial institutions supply information to credit bureaus on your financial performance, which is then used to calculate your score, a numerical range from 300 – 850, the higher the score, the better. Most adults have a credit score. If you have a credit card, if you’ve taken out a loan, or if your checking account has an overdraft protection, you’ll more than likely have a credit score. 

Why Do Insurance Carriers Look at My Credit Score?

Insurance companies predict risk, utilizing a wide array of variables which may have an impact when setting your rates. While driving history is one of the most important factors in determining your auto insurance rates, credit score is often factored in as well.

A 2002 Conning & Co. study, Insurance Scoring in Personal Automobile Insurance: Breaking the Silence, found that “92 percent of respondents to Conning’s survey of the 100 largest personal automobile insurers use credit data in underwriting new business.”

In a July 2007 Federal Trade Commission’s report to Congress, Credit-Based Insurance Scores: Impacts of Consumers of Automobile Insurance, determined that for decades a credit score is a good predictor or risk. 

How Much Does My Credit Score Affect My Premium?

Determining how much your credit score affects your premium is less straightforward.

Generally, a score between 800 – 850 is considered excellent, 740 – 799 very good, 670 – 739 good, 580 – 669 fair, 300 – 579 poor. Most credit scores fall between 600 – 750. To get an idea of how your credit score might impact your rates, Consumer Reports found that the average difference paid between those with a “good” score and those with the best score was $214 in yearly premiums.

A study by WalletHub found that those with no credit pay an average of 53% more for car insurance than those with excellent credit, with some states fluctuating as high as 122%.

The same WalletHub study found that carriers reliance on credit score varies widely, with Farmers relying on it the most heavily. The bottom line is you’ll want to shop around with different carriers depending upon your state and credit score, and you may have to read the fine print or search through your insurer’s website to find specific information about where your insurer retrieves credit information and how they use it in pricing your insurance. 

How Do I Know if My Insurer Is Using My Credit Score to Calculate My Rate?

Unless you live in a state where the practice is prohibited, chances are good that your insurance carrier takes your credit history into consideration. All 15 of the largest auto insurers use credit scores in their assessments.

WalletHub’s study looked at how transparently companies disclose their sources of credit information and provide information about credit history usage to customers. Again, results varied by carrier.

Practically speaking, you may have to read the fine print or search through your insurer’s website to find specific info about where your insurer retrieves credit info and how they use it in pricing your insurance.

More: Compare car insurance quotes

What Should I do if I Have Bad (or No) Credit?

It’s in your best interest to take steps to improve your credit score. Remember, credit scores are formed over time and good credit takes time to build, though small mistakes such as missed payments can bring your score down. Still, there’s no reason to be discouraged.  Focusing on financial stability as an overall strategy may result in lower car insurance quotes as well as other benefits.

Not all auto insurers are the same, and you may find a better match by comparing quotes from multiple companies.

Some other suggestions for short-term improvements:

  • Pay all bills on time.
  • Get rid of all small credit debt.
  • Start good saving habits.
  • Create a financial plan.

In the long term:

  • Use credit cards wisely (never to live above your means).
  • Prioritize paying off credit card and other "bad" debt.
  • Be aware of the dangers of opening multiple credit lines. That signifies risk – as chances are, a new credit line means you are looking to spend more.
  • Check your credit report for errors. They do happen! For example, verify any late payments to ensure they were truly missed.
  • Seek out new quotes when your credit score changes. Your rates could improve!

Is This Fair?

Most states still seem to think so. Auto insurers are legally allowed to look at your credit score, number of credit cards, late payments and possible bankruptcies to determine your coverage rate. That said, insurers are not allowed to use it to determine whether or not you qualify for a policy. Rather, they can use it solely to determine a rate.

Unless you live in California, Massachusetts, or Hawaii, your credit score is likely influencing your premium.

Jeffrey Junkas of the Property Casualty Insurers Association of America, states, “Insurers use insurance scores because after decades of use and numerous studies, they have proven to be predictive and allow for more accurate underwriting and pricing. More accurate underwriting and pricing means that policyholders pay based on the level of risk that they represent. Those who represent a lesser risk pay less; those that represent a greater risk pay more. Insurers use a variety of factors for underwriting and rating that have been statistically proven to help predict which consumers are less likely to file a claim or how expensive those claims may be. This is the fairest way to price insurance because it reflects the level of risk for a driver.”

However, not everyone thinks this practice is fair. Many see it as a fine line to price optimization, which is a pricing practice based on an individual’s occupation, education, and other factors. Companies use data mining to determine which individuals are unlikely to switch carriers, and they raise their rates accordingly. As more and more states ban this practice, including Maryland, Ohio, California, Florida, Indiana, D.C. and Delaware, we could see a change in credit score practices in auto insurance.

Price optimization is often looked at as discriminatory and has been banned in many states, as it typically ends up hurting those with low income. Credit scores in relation to policy prices could work in a similar manner, and in time, perhaps, more states will ban its usage. 

Fair Credit Reporting Act (FCRA):

For now, keep your rights in mind. The Federal Trade Commission’s Fair Credit Reporting Act (FCRA) requires that any user of a credit report notify the consumer if the report resulted in an adverse action. With car insurance, this would be a denial of a premium or a raised policy rate. These notices often come with your policy or policy renewal. Read over your policy carefully, as the notifications may be hidden. If you see reasons listed, perhaps, it’s time to shop around!