The Role of Credit Score in Determining Insurance Rates

John Davey

Updated

October 20, 2023

Edited By

Fausto Bucheli Jr

Introduction

Your credit score is a number that is used to predict how likely you are to repay a loan on time. It is calculated based on your credit history, which includes information about your past borrowing and repayment behavior.

Insurance companies use credit scores to help them set rates. They believe that people with higher credit scores are less likely to file insurance claims. This is because people with higher credit scores are generally seen as being more responsible and financially stable.

If you have a bad credit score, you may be wondering how it will affect your auto insurance rates. In this article, Cheapinsurance.com will explore the role of credit scores in determining insurance rates, as well as suggest some tips for finding cheap insurance with a bad credit score.

We will also answer the following questions:

What is a credit score?
How does a credit score affect insurance rates?
Why do insurance companies use credit scores?
What is the relationship between credit scores and insurance claims?
How much does my credit score affect my insurance rates?
Do all insurance companies use credit scores to set rates?
What are some other factors that affect insurance rates?
What are some tips for finding cheap insurance with a bad credit score?
How can I get cheap insurance if I have a bad credit score?
Which States prohibit Credit Scores for setting Insurance Premium rates?

Key Takeaways:

Credit score is one of the factors that insurance companies use to set rates.
People with higher credit scores generally pay lower insurance rates than people with lower credit scores.
There are a number of things you can do to find cheap insurance with a bad credit score, such as comparing quotes from multiple insurance companies, shopping around for insurance discounts, and bundling your insurance policies.
Some states prohibit credit scores from being used to set insurance premium rates

What is a credit score?

A credit score is a three-digit number that is used to predict the likelihood that you will repay a loan on time. Credit scores are calculated based on your credit history, which includes information about your past borrowing and repayment behavior.

The two most common credit scoring models are FICO and VantageScore. Both models use a similar scoring system, with a score of 800 or higher considered to be excellent credit.

How does a credit score affect insurance rates?

Studies have shown that there is a correlation between credit scores and insurance claims. People with lower credit scores are more likely to file insurance claims than people with higher credit scores. For example, a study by the Insurance Information Institute found that drivers with bad credit were 80% more likely to file a claim than drivers with good credit.

Why do insurance companies use credit scores?

Insurance companies use credit scores because they help them to predict risk. By using credit scores, insurance companies can identify customers who are more likely to file claims and charge them higher rates. This helps to keep rates lower for customers who are less likely to file claims.

What is the relationship between credit scores and insurance claims?

There is a correlation between credit scores and insurance claims. People with lower credit scores are more likely to file insurance claims than people with higher credit scores. This is because people with lower credit scores are generally seen as being less responsible and financially stable.

How much does my credit score affect my insurance rates?

The amount that your credit score affects your insurance rates varies depending on the insurance company. However, a study by the Consumer Federation of America found that people with bad credit can pay up to 72% more for car insurance than people with good credit.

Do all insurance companies use credit scores to set rates?

Not all insurance companies use credit scores to set rates. However, the majority of insurance companies do use credit scores.

What are some other factors that affect insurance rates?

In addition to credit score, there are a number of other factors that can affect your insurance rates, such as:

What are some tips for finding cheap insurance with a bad credit score?

There are a few things you can do to find cheap insurance with a bad credit score:

Compare quotes from multiple insurance companies.
Shop around for insurance discounts.
Raise your deductible.
Bundle your insurance policies.
Consider usage-based insurance.

How can I get cheap insurance if I have a bad credit score?

The best way to get cheap insurance if you have a bad credit score is to compare quotes from multiple insurance companies. Insurance rates vary from company to company, so it is important to shop around to find the best possible price.

You can also save money on insurance by taking advantage of discounts. Many insurance companies offer discounts for things like safe driving, good student grades, and military service.

If you are willing to pay a higher deductible, you can also lower your monthly insurance premiums. The deductible is the amount of money that you have to pay out of pocket before your insurance coverage kicks in.

You can also save money by bundling your insurance policies. Many insurance companies offer discounts to customers who bundle their home and auto insurance policies.

Finally, you may want to consider usage-based insurance. Usage-based insurance is a type of insurance that rewards you for driving safely. With usage-based insurance, you pay a premium based on how much you drive and how safely you drive.

Which States prohibit Credit Scores for setting Insurance Premium rates?

As per the National Association of Insurance Commissioners (NAIC), the following states have either banned or limited the use of credit scores by insurance companies in determining policy rates: California, Hawaii, Maryland, Michigan, and Massachusetts.

Oregon and Utah, have established prohibitions on the use of credit history information in certain circumstances.

In Washington State, a ban on using credit scoring for insurance rate setting by the Washington Office of the Insurance Commissioner was overturned by a judge on August 29, 2022. As a result of this ruling, the Credit Scoring Ban in Washington State is no longer in effect.

Conclusion

Credit score is one of the factors that insurance companies use to set rates. People with higher credit scores generally pay lower insurance rates than people with lower credit scores. There are a number of things you can do to find cheap insurance with a bad credit score, such as comparing quotes from multiple insurance companies, shopping around for insurance discounts, and bundling your insurance policies.