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How credit history impacts car insurance rates: A comprehensive guide

Yahoo Personal Finance· Getty Images
Updated 11 min read

When you lease a car or apply for an auto loan, you know your credit score plays a role in what interest rate you’ll pay. However, did you know your credit can also be factored into your car insurance rate?

While insurance companies don’t use credit as a determining factor in the exact same way lenders do, having poor credit can end up increasing your insurance payments. Likewise, a good credit history can lower what you pay each month.

Most of the major car insurance companies – Allstate, Geico, Nationwide, Progressive and more – include an individual’s credit history as one of the factors in determining auto insurance rates.

Credit history is often a reflection of how financially responsible a person is – particularly when it comes to borrowing money. Several components – such as paying bills on time, how much outstanding debt you have, the age of your oldest line of credit and using different forms of credit – are evaluated on a credit check to come up with a credit score.

While lenders – like banks and mortgage companies – often rely on what’s known as a FICO score to make determinations about whether you’d qualify for a loan and what your interest rate will be, insurance companies use a different credit scoring method known as a credit-based insurance score.

A credit-based insurance score (CBIS) is a numerical value insurance companies use in their underwriting process to determine insurance rates based on the analysis of an applicant’s credit history.

Some companies come up with their own in-house criteria to determine CBIS, while others outsource to third-party credit scoring companies like LexisNexis Risk Solutions. TransUnion and the Fair Isaac Corporation (FICO) also develop credit-based insurance scores, but they differ from the credit scores used when you apply for a credit card or take out a loan.

Unlike the traditional credit scores that lenders use, credit-based insurance scores aren’t generally available for consumers to view. Also, car insurance companies aren’t using these scores to assess your ability to make monthly payments on time. They’re more concerned about whether you are more or less likely to file numerous car insurance claims – costing more than what the company is collecting in auto insurance premiums.

But what does your credit history have to do with your likelihood of having car insurance claims?

According to the Insurance Information Institute, studies have shown that there’s a correlation between credit status and insurance claims history. People with better credit tend to file fewer auto insurance claims. Conversely, individuals with poor credit tend to file more claims.

It is in an insurance company’s best interest to reduce the money they pay out in auto insurance claims. Therefore, insurers tend to issue lower premiums to those with good credit and higher premiums for those with bad credit.

Where you live can have an impact on how auto insurance companies use credit information in setting insurance rates. In California, Hawaii, Massachusetts, and Michigan, there are laws prohibiting insurance companies from using credit as a determining factor in the underwriting process.

Other states have similar legislation in the works or have established laws that limit how credit is used by insurers. For example, in Maryland, auto insurance companies are allowed to use credit history to determine rates, but they can’t deny or cancel a policy due to your credit.

Insurance companies generally see people with bad credit as riskier to insure – and they issue higher rates to counteract what they potentially might have to pay out in increased claims.

If your credit is good, however, you could benefit from lower car insurance rates, because insurance companies are betting that you won’t be filing many claims costing their company money.

According to the insurance comparison site The Zebra, the average annual auto insurance premium for someone with excellent credit is about $1,506 while someone with poor credit would pay about $3,147.

Each insurance company has its own criteria for factoring credit into the underwriting process. The weight given to various components that make up an individual’s creditworthiness – such as payment history, amount of outstanding debt and length of credit history – can vary from one auto insurer to the next.

However, being aware of what’s in your credit report can give you insight into what auto insurance companies will see when they check your credit.

Do you have a history of missed payments or accounts in collections? How much do you owe across all your accounts? How does your debt level compare to the amount of credit extended to you?

Get a copy of your credit report from the three major credit reporting bureaus – Equifax, Experian, and TransUnion. You can access a free copy of your credit report each year through AnnualCreditReport.com.

Credit history is not the only thing insurance companies are looking at when determining insurance rates. Driving record, where you live, what car you drive, your age, gender, marital status, and other factors apply.

A person with great credit but who has a history of multiple car accidents and lives in a city with high occurrences of auto theft might end up having a higher insurance premium than someone with a subpar credit history but who has never filed a car insurance claim in 25 years and lives in a town with a low crime rate.

When looking through your credit report, check carefully for errors – such as an account in collections that you paid off or new accounts open that you never authorized. You can send a dispute letter to the credit reporting agency if you spot any errors.

Also, review the various factors that may have an impact on your credit-based auto insurance score, including: credit history, credit utilization, outstanding debt, length of credit history, and credit mix.

Do you routinely pay all your bills on time, or do you have a history of making late payments? Do you have accounts that have gone into collections? Have you declared bankruptcy within the past several years? These are all factors that insurance companies will be evaluating.

Credit utilization refers to how much of your revolving credit you are using. Maxing out your credit cards reflects poorly on you as a borrower and could make insurers view you as riskier.

How much debt you have in total can also impact your creditworthiness. High amounts of outstanding debt can reflect negatively on your credit report – especially when it comes to large amounts of consumer debt or unsecured loans.

The amount of time you’ve maintained credit accounts plays a role in your overall credit health. The longer you’ve kept accounts in good standing, the better. So think twice about closing an old credit card account, even if you rarely use it.

Many credit scoring models take notice of whether you have a mix of credit types – including revolving credit (like credit cards) as well as installment credit (like student loans). Having only one account open isn’t as favorable as managing multiple credit types.

Improving your credit doesn’t happen overnight, but following these tips is worthwhile if you hope to lower your car insurance rates and demonstrate responsible use of credit.

A history of on-time payments is favorable to both lenders and insurers. If you struggle with remembering to pay your bills on time, put your bills on auto-draft so you don’t have to worry about missing payments. Open a separate bank account just for your monthly bill payments so you don’t wind up spending your bill money on other expenses.

Creating a budget that focuses on the essentials and limits other spending can help you free up money in order to pay down your debt. You may want to tackle your lowest balances first for the motivation boost of paying off an account quickly. Or you might choose to pay down your accounts with the highest interest rates first, so you end up paying less in interest over time.

Many personal finance experts say you should try to keep your credit utilization under 30%. If you can get it lower than that, even better. Paying more than your minimum payment or making additional debt payments throughout the month can help you bring down your credit utilization. Asking creditors for a credit limit increase is another way to lower your credit utilization.

Aside from improving your credit, there are other steps you can take to get the best car insurance prices.

Never settle for the first car insurance quote you receive. Seek out quotes from multiple insurance companies to nail down the best offerings available to you. Likewise, you can take advantage of online tools that will show you rates from multiple companies in a side-by-side comparison.

You can shave dollars off your insurance premiums thanks to a variety of discounts that insurance providers offer. These cost savings may not be applied automatically, so it’s essential to ask which discounts are available to you.

Some common insurance discounts include:

  • Safe driver discounts

  • Low mileage discounts

  • Bundling discounts

  • Military discounts

  • Paperless billing discounts

  • Autopay discounts

  • Discounts for paying your insurance premium annually rather than monthly

While auto liability insurance is mandatory in most areas of the country when you register a vehicle, you can choose what types of car insurance you buy and how much coverage you need. Collision insurance and comprehensive insurance are two coverage types that are often optional. If you drive an older vehicle that’s paid in full and already has some cosmetic damage, you could save money by opting out of carrying additional insurance coverage – especially if you have enough savings to fix or replace your car in the event of an accident. If you don't drive much, usage-based car insurance could be a good option in this era of rapidly rising rates.

Your car insurance deductible is the amount of money that you would pay out of pocket before your insurance coverage kicks in after filing a claim.

By opting to go with a higher deductible, you can lower your premiums. Before going this route, however, you should have a healthy emergency fund and be confident that you’ll have the money to cover your deductible should the need arise.

Yahoo Personal Finance

The connection between credit and car insurance can seem complex. The answers to the following questions should shed additional light on the matter.

Your typical credit score, or FICO score, doesn’t directly affect car insurance rates. However, auto insurance companies use a similar evaluating method called credit-based insurance scores or CBIS. These "insurance credit scores" are used to predict the likelihood of an individual filing insurance claims. It’s just one factor in determining car insurance rates, but if you want the most ideal rates, work on improving your credit.

Studies have shown that an individual’s likelihood of filing auto insurance claims is related to their creditworthiness. People with good credit tend to file fewer insurance claims, while people with poor credit tend to file more claims. Insurance companies want to minimize their risks, so they typically issue higher insurance rates to people with poor credit to hedge against the possibility that they’ll have to pay out more money than for customers with better credit. Insurance companies may pull your credit report to help determine insurance premiums, but it would be a soft inquiry that would not affect your credit score.

While some states – such as California, Hawaii, Massachusetts, and Michigan – have laws that stipulate credit cannot be a factor into issuing auto insurance, many states do look at an individual’s creditworthiness during the underwriting process. While having bad credit typically means you’ll just pay more in insurance premiums, there is a possibility that certain insurance companies could deny covering you, because they view you as too risky based on your financial history.

Credit is just one factor insurers analyze when issuing you an insurance policy. Companies also look at other criteria including driving history, location, and type of car you drive. A high credit score could mean you’d pay less in insurance premiums. However, if you have a history of getting into multiple car accidents or you live in a city with high auto theft, your high credit score may not help you get lower insurance rates.

Paying your car insurance bills on time typically does not improve your credit. However, having missed payments can cause your creditworthiness to decline. Make sure you pay your car insurance bills in full and on time to avoid inversely affecting your credit.