When you’re buying auto insurance, numerous things affect your premium, such as your driving record, where you live, and the kind of car you drive. One that tends to be a surprise for many individuals is their credit rating. In numerous states, insurers apply credit-based insurance scores to set premiums. Knowing how your credit rating can impact your premium can assist you in taking action to reduce your expenses.
What Is a Credit-Based Insurance Score?
A credit-based insurance score is a type of specialized score that insurance companies use to estimate how likely you are to make a claim. Although it is like a standard credit score, it is designed specifically to measure risk in the insurance sector. The following factors influence your credit-based insurance score:
Payment history (timely vs. late payments)
Credit history length
Outstanding debt and credit utilization ratio
Number of recent inquiries
Types of credit accounts
How Your Credit Score Can Influence Your Auto Insurance Rate
Insurance providers check credit scores due to research finding a link between lower credit ratings and increased frequency of claims. Here’s what your credit score can do to your premiums:
Good to Excellent Credit (700+): Insurers will more than likely charge you lower premiums since you’re viewed as less of a risk.
Fair Credit (600-699): You might still have competitive rates but not the cheapest.
Poor Credit (Below 600): You may be charged much higher premiums because insurers view you as a riskier driver.
Industry reports indicate that drivers with poor credit can be charged as much as 50-100% higher for the same coverage as those with good credit.
Why Do Insurers Use Credit Scores?
Insurance firms contend that credit scores enable them to better determine risk. Statistics indicate that individuals with poor credit scores make more claims and have more expensive claims. Insurers can vary rates according to the amount of risk posed by various drivers by utilizing credit-based insurance scores.
States That Limit the Use of Credit Scores in Insurance
Although the majority of states permit the use of credit scores by insurers, there are some with restrictions. States that prohibit or restrict the use of credit-based insurance scores are:
California
Hawaii
Massachusetts
Michigan (for auto insurance only)
If you reside in one of these states, insurers are not allowed to use your credit score to calculate your premium.
How to Improve Your Credit Score and Lower Your Insurance Premiums
Because your credit score is used to help determine insurance premiums, getting your credit higher can result in lower premiums. Below are ways to increase your credit score:
- Make Payments on Time
Your history of payments accounts for the most weight in your credit score. Automating your payments or reminding yourself can keep you from being late.
- Pay Off Outstanding Debt
Pay your credit card accounts down and have your credit utilization under 30% to favorably affect your score.
- Don’t Open Too Many New Accounts
Each time you make a request for new credit, it happens with a hard inquiry, causing a slight decline in your score. Avoid unwanted applications for credit.
- Look for and Correct Errors in Your Credit Report
Errors on your credit report can damage your score. You can obtain a free credit report from organizations such as Equifax, Experian, and TransUnion and contest any errors.
- Establish a Long Credit History
Having older accounts remain open and keeping your credit mix diverse (credit cards, loans, etc.) can help build a stronger score over time.
Other Ways to Lower Your Auto Insurance Premiums
Apart from raising your credit score, you can reduce your premiums by:
Looking around for more favorable rates
Bundling automobile insurance with homeowners or renters insurance
Raising your deductible
Utilizing discount opportunities (e.g., safe driver, low-mileage, good student discounts)
Conclusion
Your credit score plays a significant role in determining your auto insurance rates in many states. A higher credit score can lead to lower premiums, while a lower score may result in higher costs. By maintaining good credit habits—such as paying bills on time and keeping debt low—you can improve your credit-based insurance score and potentially save hundreds of dollars on car insurance each year.