QUICK ANSWER
Credit scores highly influence car insurance premiums in most states as insurers treat credit history as a risk indicator. Poor credit can double costs. Even though some states ban its use (CA, HI, MA, MI), consumers should improve their credit and shop around to find savings.
As Featured in
CheapInsurance.com examines how an applicant’s financial profile intersects with their driving profile in determining auto insurance quotes. Most drivers know that factors like driving record, vehicle type, and residential ZIP code influences car insurance rates. However, the credit based insurance score often plays a significant role as well. This article explains the relationship between credit and insurance, outlines scenarios where credit matters least, and highlights crucial consumer considerations. Readers can also learn more about their car insurance choices.
What Insurers Mean by a Credit-Based Insurance Score
Insurers typically use a specialized credit score, often called a credit based insurance score, instead of a standard FICO credit score. According to the National Association of Insurance Commissioners (NAIC), the factors used to calculate this score include:
- Payment history
- Outstanding debt
- Length of credit history
- New credit
- Credit mix
While often correlated with credit scores used by lenders, an insurance score is calibrated differently and is treated as just one of many factors in the underwriting process.
CheapInsurance.com by the Numbers
Data Analysis: Annual Savings from Car Insurance Comparison Sites
According to Fausto Bucheli Jr, a licensed insurance broker and owner of CheapInsurance.com, the math is clear.
“When drivers compare quotes, they are not just browsing, they are activating competition. Based on current savings data from leading comparison platforms, the average driver could save around $774 dollars per year simply by shopping smarter. That is real money staying in your pocket.”
How Much Can Your Credit Influence Your Auto Insurance Premium
Research demonstrates that in many states, drivers with poor credit profiles pay substantially more for coverage than those with an excellent credit profile. For example, aggregate data from 2023 indicates that individuals with excellent credit profiles paid around $1,947 on average, while those with very poor profiles paid approximately $4,145.
Here are the typical impacts of credit on insurance pricing:
- Premium Increase: A drop of one credit tier may raise an insurance premium by 17% or more.
- Legal Use: Insurers in most states can legally use credit scores as a pricing factor when determining a driver’s risk.
- Variability: The degree of premium increase varies significantly by state and insurer; in some cases, the difference in annual cost is more than double.
Which States Prohibit or Limit Credit Score Use in Auto Insurance
Because insurance regulation is state based, the use of credit scoring varies significantly across the country. Key rules governing this practice include the following:
- Total Bans: Four states (California, Hawaii, Massachusetts, and Michigan) have banned insurers from using credit information to set auto insurance rates in most cases.
- Partial Restrictions: Additional states, such as Maryland, Oregon, and Utah, do not ban the practice entirely but restrict how credit information can be used. For instance, it may not be used as the sole reason to cancel or deny a policy.
- Regulatory Guidance: State regulators often caution consumers to check directly with their state’s insurance department because legislation in this area continues to evolve.
Why Your History Matters for Auto Insurance Pricing
Insurers primarily utilize credit based scores for three reasons:
- Risk Proxy: Insurers view a strong credit history as a proxy for lower overall risk, associating more consistent payments and fewer financial stressors with historically fewer claims.
- Improved Risk Differentiation: Credit based insurance scores allow insurers to incorporate non driving behavior risk factors into pricing models, which significantly improves risk differentiation and, subsequently, profitability.
- Algorithmic Pricing: Because auto insurance is priced based on risk classes, many insurers integrate credit scoring as a key component of the pricing algorithm, alongside driver history, vehicle type, location, and other rating factors.
What You Can Do If Your Credit Profile Is Weak
In states where credit scores are permitted as a rating factor, drivers can take the following steps to help mitigate their impact on premium costs:
- Regular Monitoring and Correction: Insurers use a score tied to the consumer’s credit file, so inaccuracies matter. It is essential to monitor credit reports regularly and dispute any errors immediately.
- Improve Financial History: Improve payment history by staying current on all bills and keeping revolving debt levels low. These habits are key components for an insurance friendly score.
- Compare Insurer Practices: Shop for insurers whose underwriting practices place less emphasis on credit scores. This is especially relevant in states where credit use is restricted or banned.
- Inquire About Other Factors: Ask an insurer or agent what other factors are weighted heavily in the state, such as driving record or vehicle safety features, so those areas can be strengthened.
- Geographic Advantage: Drivers who move to, or live in, a state where credit scores are not allowed as a rating factor will benefit from this legal protection.
How To Interpret Your Policy And Ask Good Questions
When reviewing an auto policy or quote, informed questions can improve transparency and control costs:
- “Does the insurer use a credit based insurance score in pricing for this state?”
- “When credit is used, what portion of the rating algorithm is because of credit?”
- “If credit improves or deteriorates, will that affect the renewal premium or just new business?”
An individual’s credit profile can matter significantly for automobile insurance coverage in many states, yet the rules are far from uniform. Knowing the state’s regulations, understanding how credit based insurance scores are applied, and taking concrete steps to improve or mitigate credit impact are beneficial for managing insurance policy costs.
For decades, CheapInsurance.com has made affordable car insurance easy. Nobody wants to spend an entire weekend comparing insurance rates. Our system compares dozens of options in seconds, identifies discounts that might be missed, and explains coverage simply. By providing options, the platform ensures drivers do not overpay for unnecessary features while maintaining a robust safety net.
Founded in California in 1974 as an insurance agency, CheapInsurance.com has spent decades helping people find affordable coverage. Over time, we became one of the first brokerages to go online in 1998, making insurance shopping faster and easier.
Our mission has always been simple: insurance is a basic necessity, not a luxury. That’s why our technology quickly scans the marketplace in seconds, compares rates, and uncovers discounts that might otherwise be missed. In addition, we explain coverage in clear, simple terms.
As a result, people get real options and can avoid overpaying for features they do not need, while still maintaining strong, reliable protection.
Frequently Asked Questions About Credit Scores and Car Insurance
How does my credit score affect my car insurance rate?
Insurance companies often use credit-based insurance scores to help predict risk. Drivers with higher scores may qualify for lower premiums, while lower scores can result in higher rates, even if driving history is clean.
Can I get car insurance with a poor credit score?
Yes, you can still obtain car insurance with a poor credit score. Rates may be higher, but maintaining a good driving record, shopping multiple quotes, and considering policy adjustments can help reduce costs.
What steps can I take to lower my insurance premiums if my credit score is low?
You can lower premiums by improving your credit score over time, comparing quotes from multiple insurers, increasing your deductible, bundling insurance policies, and qualifying for discounts related to safe driving or vehicle safety features.
By
Published
Reviewed By
