Why Does My Credit Score Impact My Car Insurance Cost?

Several factors determine the cost of your auto insurance, including your driving record, credit score, claims history, age, location, years of driving experience, gender and coverage types. While many of these factors are beyond our control, some of them we can influence. Your credit score is one of these.

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      Some choices will improve your credit score, while others will reduce it. Maintaining strategic credit practices may not be easy, but it is generally achievable. Learn some of the strategies for achieving and maintaining a healthy credit score and why that matters for your auto insurance.

      How can my credit impact my car insurance?

      In general, the lower your credit score, the higher your auto insurance premiums will be. The details of how providers calculate these premiums are private, but we do know auto insurance companies use credit scores to help evaluate how risky someone is to insure.

      Credit scores are crucial for more than auto insurance rates. Your credit score plays a significant role in whether you can take out a loan, such as a mortgage, and the interest on that loan. Even for those who are primarily able to live without using credit, emergency medical or home repair loans may be necessary. Without a decent credit rating, these emergencies can cost much more.

      Why do car insurance companies care about credit scores?

      At the core of why credit impacts car insurance rates is a statistical link between lower credit ratings and higher frequency of claims filed. According to an FTC report, people with lower credit scores are statistically more likely than people with higher credit scores to file an insurance claim. Not only do lower credit scores correlate to a higher frequency of claims being filed, but they also correspond to a higher overall cost in claims.

      As insurers are private businesses, they cannot function for long at a financial loss. In keeping with this law of business, auto insurers charge customers based on how much they expect to spend on them. The result of this balancing act is that people with lower credit scores tend to have higher premiums than people with higher credit scores.

      Beyond the risk calculation of claims filing, auto insurance companies may use credit scores as a predictor of how likely a customer is to pay their premium on time. Credit ratings are used to determine the risk of delinquency on payments from customers. Lower credit ratings are connected to a higher risk of not paying minimum amounts on time.

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      What car insurance companies do not use credit scores?

      While there are insurance providers that don’t check credit, most of them are relatively small and localized. Many also have high initial premiums to compensate for specializing in high-risk drivers.

      However, some widely available auto insurance companies have reported at various times that they do not factor credit into their premiums. Progressive and Nationwide are two such companies.

      With both companies, it is also possible to enroll in a usage-based plan. These plans do not use credit ratings to determine rates. Instead, these plans base your price on how you drive. The dominant factor in determining rates on a usage-based plan is how safely you drive. These plans let you prove how much of a financial risk you are as a driver, and the provider uses that data to decide your rate.

      However, three states have banned the use of credit scores in determining auto insurance rates. These states are California, Hawaii and Massachusetts.

      How can I improve my credit score to lower my car insurance cost?

      Thankfully, credit scores can change. It takes time, patience and intent, but raising your credit score is an achievable goal. Strategizing is essential because this process can take months or years, depending on your situation.

      Here are some ways to improve your credit score:

      • Make payments on time and always pay at least the minimum amount.
      • Maintain a healthy credit utilization rate.
      • Use credit monthly and pay it off monthly.
      • Budget around paying off debt.
      • Do not take out loans with higher premiums than you can comfortably afford.
      • Become an authorized user on another person’s account.

      If you do these things wisely and over time, your credit score will improve over time.

      We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

      Joshua Cox-Steib

      Contributing Writer

      Joshua Cox-Steib is a personal finance contributor. He lives in Tulsa, Oklahoma, with his wife and their three pets. He spends his spare time reading, writing, and gardening. Find out more on Joshua Cox-Steib at www.jcswriting.com.