How Credit Scores Affect Your Car Insurance Rates

Ron Trumbo Insurance Editor

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Except in a few states, budget-minded drivers like you should recognize that your credit history can affect how much you pay for car insurance.

Interestingly, your credit score and credit report affect not only how much you pay for car insurance, but your credit score can impact whether you can get insurance at all, or if your policy is able to be renewed.

The Lower the Credit Score, The Higher the Insurance Premium

Car insurance companies have been known to use credit reports to develop rating systems that classify consumers based on multiple factors. As a consumer, how you're classified – whether you fall into a preferred, average, or high-risk class – can impact what rate an insurance company charges you. According to a Kiplinger article, "How Credit Scores Affects Insurance Premiums" by Kimberly Lankford, it was proven that the 10% population with the lowest credit scores were twice as likely to make an insurance claim than the 10% population with the best credit scores.

Your credit score and credit report can not only affect how much you pay for car insurance, but your credit score can even impact whether you can get insurance at all, or if your policy is able to be renewed.

Credit Scores and Car Insurance Rates

The use of credit scores in insurance rating became a common practice about 10 years ago with homeowners insurance. It grew out of insurance companies attempting to build rating plans that would assess consumer risk levels as accurately as possible, in order to predict their own expenses as well as charge appropriate rates.

Banks and other financial institutions have long used credit information in determining risk on home loans, and the correlation between those financial records and insurance risks became clear.

Not Every State Allows Insurance Companies to Use Credit Score to Determine Insurance Rates

The laws and regulations that govern insurance are set at the state level, therefore, where you live can determine what information companies can gather and how they can use it, as well as what your rights are. California, Massachusettes, and Hawaii do not allow the use of credit score in auto insurance rates. Maryland does not allow credit scores to be used in determining home insurance rates.

Credit Scores Are Only One Factor Used in Insurance Rates

Generally, in states where credit may be used for underwriting and payment options, insurance companies use your basic credit information into formulas that also take into account your accident history, years you have been driving, where you live, your age, gender and assorted other relevant facts about you.

If you're interested in finding out if credit was used to determine your rates, contact your insurance carrier. Many states require insurance companies to tell consumers what top factors have been used in determining rates, but your insurer may not even understand the exact significance of some of the numbers, since they often come from outside sources.

Check your credit scores online: https://www.annualcreditreport.com, Equifax, Experian, TrasUnion