Your credit score can play a significant role in what you pay for auto insurance. It depends on where you live, though, as some states permit the use of credit-based insurance scores while others don’t. Here’s a closer look at the relationship between credit scores and auto insurance and the steps to take to improve your credit score to potentially qualify for more affordable coverage.
An Overview of Auto Insurance
Before discussing how credit scores affect auto insurance, it’s worth understanding how policies work, and other factors providers consider when setting premiums.
Types of Auto Insurance Policy Coverages
Below is an overview of the common auto policy coverages:
- Liability coverage: It covers damages you cause to others in an accident and is legally required in most states.
- Collision coverage: It covers the cost of repairs if your vehicle is involved in a collision, regardless of who’s at fault.
- Comprehensive coverage: It covers the cost of damages resulting from theft, vandalism or natural disasters.
- Personal injury protection (PIP): It covers medical expenses for both you and your passengers if you’re involved in an accident, regardless of who is at fault.
- Uninsured /underinsured motorist coverage: It protects you against financial losses if you’re hit by a driver without coverage or with inadequate coverage.
Determining Auto Insurance Premiums
Car insurance providers consider the following factors when setting premiums:
- Driving record: A clean driving record typically means lower premiums. But if you have a history of auto accidents, DUI convictions or other moving violations, expect to pay far more for coverage.
- Age: Younger and less experienced drivers generally receive higher premiums, as the risk of being involved in an accident is much higher. By contrast, older and more experienced drivers often qualify for the best rates.
- Vehicle make and model: Insurers also take the year, make and model of your vehicle into consideration. More expensive vehicles equate to steeper repair costs, and you’ll likely pay more for a policy. The size of the vehicle can also impact coverage costs.
- Mileage: You could pay less for a policy if you drive less and choose a usage-based insurance policy. But if you have a long daily commute or travel long distances often, expect to pay higher premiums.
- Location: Metropolitan areas that are densely populated with loads of traffic or that have higher incidents of theft are more costly for drivers. However, you’ll likely pay less if you live in a suburban or rural area with less traffic and criminal activity.
- Coverages: Your premiums will also depend on the coverage levels you select. It’s not ideal to be underinsured to cut costs, though. Instead, consider increasing your deductible to an amount you can afford to pay out-of-pocket should you need to file a claim in the future.
The Importance of Credit Score
Your credit scores impact many areas of your life. This article focuses on how it could potentially affect the price you pay for auto insurance coverage.
How Credit Scores Are Calculated
Credit scores range from 300 to 850 – the higher, the better. The FICO credit-scoring model, which is the most widely used, computes your score based on these factors:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
If you recently checked your credit score and aren’t quite sure what it means, here’s a breakdown of how this three-digit number is categorized:
- 300 to 579: Poor credit score
- 580 to 669: Fair credit score
- 670 to 739: Good credit score
- 740 to 799: Very good credit score
- 800 to 850: Excellent credit score
Does Credit Score Affect Auto Insurance?
If state laws permit the use of credit-based insurance scores in your state, you could pay more or less for coverage depending on your credit history.
The Connection Between Credit Scores and Auto Insurance
Below is a more in-depth look at how credit scores are used in the auto insurance industry.
Industry Practices
Again, insurance companies sometimes evaluate credit-based insurance scores when setting premiums. This practice is relatively common in states where it’s allowed.
Why Insurers Look at Credit Scores
Insurers believe there’s a correlation between credit scores and the risk of filing a claim. In fact, studies show that drivers with lower credit-based insurance scores are more likely to file a claim. However, those with good credit are generally more responsible and less likely to be involved in an auto accident.
How Credit Score Affects Auto Insurance Rates
Positive Credit Score Impact
Again, having a good credit score can lower your car insurance rates. Providers may consider you less risky and reward you with better rates.
Negative Credit Score Consequences
If you have a low credit score, insurance companies consider you a higher risk. Consequently, you could pay more for an auto insurance policy.
Variations by Region and Insurer
Auto insurance premiums can vary widely depending on where you live and which company you choose. Local laws and individual insurer policies both play significant roles in determining how your credit score affects your rates.
State Regulations on Credit Score Use in Auto Insurance
California, Hawaii, Maryland, Massachusetts and Michigan ban insurers from using credit scores to set premiums. Oregon and Utah allow it but with restrictions.
Differences Between Insurance Companies
Insurance companies have their own policies on how they use credit scores. Some insurers might weigh your credit rating, while others might view it as less significant compared to other factors like your age and driving record.
How to Improve Your Credit Score to Lower Insurance Rates
If your credit score needs work, these strategies will help you improve it and potentially qualify for lower premiums on your car insurance policy.
Steps to Improve Credit Score
- Step 1: Pay your bills on time.
- Step 2: Lower your revolving (i.e., credit cards, lines of credit) debt balances.
- Step 3: Don’t close old credit accounts in good standing.
- Step 4: Only apply for new credit as needed.
- Step 5: Maintain a good mix of revolving and installment accounts (i.e., personal loans, student loans, car loans).
Monitoring Your Credit Report
As you work towards improving your credit health, it’s vital to monitor the activity in your credit report, as it’s used to calculate your credit score.
Be sure to check your credit report regularly. You can get a free copy each week from the major credit bureaus – Experian, TransUnion and Equifax – at AnnualCreditReport.com.
Look for any errors or inaccuracies. If you find mistakes, file disputes promptly with the respective credit bureau(s).
Using credit monitoring services can also alert you to changes in your credit score. These services notify you of activities like new accounts, inquiries or changes in account statuses.
What Else Can You Do to Get Lower Insurance Rates?
If you’re tired of overpaying for auto insurance coverage, visit the Experian Insurance Marketplace. It’s a free tool that shops for better rates on your behalf from over 40 of the top auto insurance providers. This resource also shares insights on ways to lower your rate over time and provides real-time alters when rates drop in your area.
Even better, if Experian finds you a better deal and you decide to switch, the platform will help you handle the process from start to finish. Navigate to the website to learn more about Experian, this free tool, and other products that can help you improve your credit health.
