How Your Credit Score Affects Car Insurance Rates

Your credit score doesn't just affect your ability to get loans or credit cards – in most states, it significantly impacts your car insurance premiums. Understanding how credit-based insurance scoring works can help you save hundreds of dollars annually on your car insurance and make informed decisions about improving your financial health.

This guide explains the relationship between credit scores and car insurance rates, why insurers use credit information, how much it affects your premiums, and proven strategies to improve your insurance credit score.

1. What is Credit-Based Insurance Scoring?

Credit-based insurance scoring is a practice where insurance companies use information from your credit report to help determine your insurance premiums. This isn't the same as your traditional credit score – insurers use specialized models designed specifically for insurance risk assessment.

How It Works

Insurance companies pull a "soft inquiry" from your credit report, which doesn't affect your credit score. They then use this information along with other factors to calculate your premium. The credit information is typically weighted as one of several rating factors, not the sole determinant of your rate.

What Information is Used

Insurers typically look at:

• Payment history: Late payments, defaults, bankruptcies
• Outstanding debt: Total amount owed and credit utilization
• Length of credit history: How long accounts have been open
• Types of credit: Mix of credit cards, loans, mortgages
• New credit: Recent credit inquiries and new accounts

What's NOT Used

Insurance credit scoring excludes certain information that traditional credit scoring includes:

• Income level
• Age, race, gender, or marital status
• Employment history
• Where you live (address)
• Interest rates on existing accounts

2. Why Do Insurers Use Credit Scores?

Statistical Correlation

Extensive insurance industry research has shown a strong statistical correlation between credit scores and insurance claims. Studies consistently find that people with lower credit scores are more likely to file insurance claims, while those with higher scores tend to file fewer claims.

Risk Assessment Tool

Credit information helps insurers:

• Better predict future claims likelihood
• More accurately price policies based on risk
• Reduce the need to pass costs from low-risk to high-risk drivers
• Improve overall pricing accuracy

Industry Support

Major insurance trade organizations and regulatory studies have found that credit-based insurance scoring:

• Is actuarially sound and not discriminatory
• Benefits consumers through more accurate pricing
• Helps keep overall insurance costs lower
• Provides an objective risk assessment tool

3. How Much Credit Affects Your Rates

Significant Rate Differences

The impact of credit on car insurance rates can be substantial. According to industry studies:

• Drivers with poor credit pay 50-100% more than those with excellent credit
• Improving from poor to good credit can save $500-1,500 annually
• Credit typically accounts for 20-50% of your premium calculation

Variation by Insurer

Different insurance companies weight credit differently:

• Some insurers place heavy emphasis on credit scores
• Others use credit as just one of many factors
• A few companies don't use credit at all (though they're rare)
• This variation makes shopping around especially important

Impact Across Coverage Types

Credit-based scoring typically affects all coverage types proportionally, though some insurers may apply it more heavily to:

• Comprehensive and collision coverage
• Higher coverage limits
• Premium-level policy features

4. State Laws and Regulations

States That Prohibit Credit-Based Scoring

Three states completely prohibit the use of credit in auto insurance pricing:

• California: Credit cannot be used as a factor
• Hawaii: Credit use is prohibited
• Massachusetts: Credit scoring not allowed

States with Restrictions

Several states have limitations on credit use:

• Maryland: Limits how much credit can affect rates
• Oregon: Restricts credit use for certain customers
• Utah: Limits the impact of credit on renewals
• Washington: Caps credit-based rate increases

Protected Circumstances

Many states prohibit using credit against consumers in certain situations:

• Recent identity theft victims
• Active military deployment
• Recent divorce or serious illness
• Natural disaster victims
• Unemployed due to employer downsizing

5. Insurance Credit vs. Traditional Credit Scores

Key Differences

Insurance credit scores differ from traditional FICO or VantageScore models:

• Purpose: Designed specifically to predict insurance claims
• Weighting: Different emphasis on various credit factors
• Scale: May use different scoring ranges
• Updates: May not update as frequently as traditional scores

Common Insurance Credit Models

• LexisNexis Attract: Widely used by major insurers
• FICO Auto Insurance Score: FICO's insurance-specific model
• TransUnion TrueRisk: TransUnion's insurance scoring model
• Proprietary models: Some large insurers develop their own

What This Means for You

Your insurance credit score might be different from your traditional credit score, but improving traditional credit factors will generally improve both:

• Pay bills on time consistently
• Keep credit card balances low
• Maintain older credit accounts
• Limit new credit applications

6. How to Improve Your Insurance Credit Score

Payment History (35% of score)

The most important factor in any credit score:

• Pay all bills on time: Set up automatic payments
• Catch up on past-due accounts: Bring accounts current
• Avoid new late payments: Even one can hurt your score
• Consider payment plans: For large past-due amounts

Credit Utilization (30% of score)

Keep your credit card balances low relative to credit limits:

• Target under 30%: Of available credit on each card
• Ideal under 10%: For the best scores
• Pay down balances: Before statement dates
• Don't close cards: Keep older accounts open

Length of Credit History (15% of score)

• Keep older credit accounts open
• Become an authorized user on family members' accounts
• Avoid closing your oldest credit card
• Use older accounts occasionally to keep them active

Types of Credit (10% of score)

• Maintain a mix of credit types (cards, loans, mortgage)
• Don't open accounts just for variety
• Consider a secured credit card if rebuilding credit

New Credit (10% of score)

• Limit new credit applications
• Space out applications over time
• Shop for rates within 14-45 day windows for loans
• Avoid opening multiple credit cards quickly

7. Monitoring Your Credit

Free Credit Reports

You're entitled to free annual credit reports from each bureau:

• AnnualCreditReport.com: The only official source
• Review all three bureaus: Experian, Equifax, TransUnion
• Space them out: Check one every four months
• Look for errors: Dispute inaccuracies immediately

Credit Score Monitoring

Many services offer free credit score monitoring:

• Credit card companies often provide free scores
• Banks may offer credit monitoring services
• Third-party services like Credit Karma or Credit Sesame
• Set up alerts for significant score changes

Disputing Errors

If you find errors on your credit report:

• Contact the credit bureau and creditor in writing
• Provide documentation supporting your dispute
• Follow up within 30 days
• Keep records of all correspondence

8. Alternatives for Poor Credit Drivers

Shop Around Extensively

Different insurers weight credit differently, so compare quotes from:

• Major national insurers
• Regional and local companies
• Companies that don't use credit heavily
• Direct writers vs. agent-based companies

Look for Alternative Rating Factors

Some insurers offer programs that consider other factors:

• Usage-based insurance: Based on actual driving behavior
• Pay-per-mile insurance: For low-mileage drivers
• Snapshot programs: Monitor driving habits for discounts
• Education-based pricing: Some companies offer discounts for education

Maximize Other Discounts

• Multi-policy bundling discounts
• Good driver discounts
• Vehicle safety feature discounts
• Defensive driving course discounts
• Professional organization memberships

Consider State-Specific Programs

Some states offer assistance programs:

• Low-income auto insurance programs
• Good driver insurance plans
• State-sponsored insurance pools
• Payment plan options

Conclusion

Understanding how credit affects your car insurance rates empowers you to take control of your insurance costs. While you can't change your credit score overnight, consistent effort to improve your credit will pay dividends both in lower insurance premiums and better financial opportunities overall.

Start by checking your credit reports for errors, then focus on the factors that have the biggest impact: paying bills on time and keeping credit card balances low. Remember that credit improvement is a marathon, not a sprint – but the financial benefits make the effort worthwhile.

In the meantime, shop around for insurance regularly. Even with poor credit, you may find insurers that offer competitive rates or place less emphasis on credit scoring. The key is persistence and understanding that your credit score is just one factor in determining your insurance rates.