You know having a good credit score is important in life. You may need proof of good credit for future car loans, mortgages, large purchases, and more. Plus, a high score can help you lock down lower interest rates. Yet, you may wonder – does your credit score affect your car insurance premium?
The answer is: Yes.
Unless you live in California, Hawaii, or Massachusetts, states that have banned insurers from using credit data to price premiums, your credit score plays a role in how much you pay for car insurance, for better or worse.
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The most recent study to prove the link between credit score and auto insurance rates was conducted by WalletHub. This post highlight the results of the full study and explains how best to proceed. The findings indicated that there was an average 49% variance in premium costs between a driver with an excellent credit score and one without any credit history.
The relationship between credit and car coverage can’t be avoided, unless you relocate to an aforementioned state.
Why Do Insurance Carriers Look at My Credit Score?
You probably thought that your driving history was the most important factor in determining your auto insurance rates. While that is one of the many elements, your credit score fits into the equation as well. Studies, like the ones outlined in the FTC’s report to Congress, have shown for decades that credit score is a good predictor of risk. An individual with more risk is likelier to file numerous or costly claims with the insurance company, and is therefore more expensive for a company to insure.
Underlying this cost analysis is research showing that people who take risks are likely to do so across the board. For example, behavior that can lead to bad credit (like paying credit card bills late) correlates with riskier driving.
In layman’s terms: if you haven’t proven that you’re financially responsible, insurers assume that you’re not a responsible driver, and will charge more to insure you.
How Much Does My Credit Score Affect My Premium?
Determining how much your credit score affects your premium is less straightforward. The extent to which your car insurance rate is impacted by your credit score depends on a few factors, including:
Your state. Based on the WalletHub study, the average state’s car insurance rates fluctuate by 64% when the applicant has excellent credit versus no credit history. In some states, credit data has a stronger impact on auto insurance premiums. Connecticut has the smallest credit score impact on insurance rates at 15%, while Michigan’s is as high as 115%.
Your insurance carrier. Some insurance companies rely more heavily on credit score when pricing premiums. Premium quotes from Allstate fluctuated the most in WalletHub’s study (116%). Furthermore, insurers do not always use the typical FICO scores. Instead, they may have their own credit score models that could vary your perceived risk.
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.
What Should I do if I Have Bad (or No) Credit?
Credit scores are made up of three digits, ranging from 500-900 – the higher the number the better. Remember, credit scores are formed over time and good credit takes time to build though small mistakes can bring your score down easily. However, there’s no reason to be discouraged. There are short-term priorities as well as long-term focuses that you can keep in mind. Focusing on financial stability is an overall smart strategy, and will likely result in lower car insurance premiums as well as other benefits.
In the short term:
If your insurer relies heavily on credit information, you may want to get some quotes from companies who don’t use credit score as prominently when pricing your premium. If the savings is significant, consider switching. You can get free quotes at EverQuote.com. Not all auto insurers are the same, and you may find a better match by receiving quotes from multiple carriers.
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! Check up on late payments to be sure 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.
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!