How Your Credit Affects Your Car Insurance—and What You Can Do about It

Insurance is not a one-size-fits-all product. If you’ve ever talked to an insurance agent or requested a quote online, you know you have to answer a bunch of questions before you receive your quote. This is because insurance is all about risk, and insurance companies use your answers to determine how likely you are to file a claim (and thus cost them money).

Does Credit Impact Your Car Insurance?

Insurance companies use countless factors to determine your risk and set your rates. Many of these are obvious, such as where you live, your driving record, and what kind of car you drive. But there are also a few factors that are less intuitive, like your credit score.

Credit is considered a rating factor for nearly all US drivers. Insurance underwriting (that is, how insurance companies assess and price your individual risk) is all about statistics, and insurance companies have found that people with lower credit scores statistically file more claims than those with higher scores.

In fact, a Federal Trade Commission study found that drivers with low credit scores are more likely to file a claim than drivers with higher credit scores. It also found that claims filed by drivers with low credit scores cost nearly twice the dollar amount as those filed by higher-credit drivers.

How Much Your Credit Score Affects Your Rates

Insurance companies in California, Massachusetts, and Hawaii are not legally allowed to use credit scores as rating factors per state regulations. In the rest of the country, however, credit can have a very real impact on your auto insurance rates.

A report from The Zebra explored how your credit rating affects what you pay for car insurance:

Drivers with poor credit (scores of 524 or below) pay more than twice as much for car insurance as those with excellent credit scores (of 823 or above).
Drivers can increase their credit scores by one tier (e.g. from poor to fair) to save an average of 17% on their annual auto insurance premiums.
Improving your credit score from poor to excellent would yield 53% savings (an average of $1,281 per year).

Is your low credit score costing you on car insurance? There are behaviors you can change to improve your rates in the future. Here are a few steps to help get you back on track.

1. Know Your Credit Health

The first step to healthier credit is understanding what your credit score currently is. Experts recommend checking your credit report once every four to six months. Regularly review what your credit score is and why. (You can check your credit report for free at Credit.com.) Once you know where you are, you can make goals to improve your overall credit health.

2. Practice Financially Smart Behavior

Now that you understand your overall credit health, you can take specific steps to improve it. Keep in mind that no matter what your credit score is, you need to practice financially smart behavior. This means developing a savings plan, managing your debt, and monitoring your credit. Review Credit.com’s Personal Finance Learning Center for more tips on developing and maintaining financially smart behavior.

3. Check Your Insurance Rates

Many factors can impact your insurance rate, and these factors can change relatively often—so check your rates regularly. Coverage lapses, violations, claims on your driving record, and even your age can have a big impact on your rates. Compare auto insurance rates at least every six months to make sure you have the right coverage and you’re paying the best rate for it.

Keep an eye on your credit report, your financial habits, and your insurance rates for the best deals.

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