How Does a Credit Score Affect Car Insurance?

how does a credit score affect car insurance

How Your Car Insurance Premiums Are Affected by Your Credit Score

Your credit score affects your interest rate on a loan. Similarly, your credit score affects car insurance premiums as well. Lower scores typically correlate with higher rates. California, Hawaii and Massachusetts are the only states that do not allow credit to be used in setting premium rates.

Keep in mind that insurance companies use a special version of credit scores. This is unlike a mortgage or car loan.

Why Are Credit Scores Used?

A study at the McCombs School of Business at University of Texas at Austin found that the lower the credit score of the insured, the more likely the individual will cost the insurer more on an auto insurance policy.

Another study by the Federal Trade Commission (FTC) found that  there is a statistical correlation between how much insurance premiums cost and policy holder’s credit score, concluding that “on average, higher-risk consumers will pay higher premiums and lower-risk consumers will pay lower premiums.”

Two Different Kinds of Credit Inquiries

Whenever someone asks for your credit report, that is noted in your credit history. Based on a report by Consumer Financial Protection Board (CFPB), there are two kinds of inquiries:

Hard Inquiries

Every time you apply for a line of credit the lender’s inquiry appears on your credit report. These kinds of inquiries are known as hard inquiries, and they indicate how often and how recent you applied for credit. New hard inquiries tell lenders you just added more debt, which could affect your credit score.

Soft Inquiries

Soft inquiries are those made by you, the consumer, by lenders looking at existing accounts, or by prospective lenders for the purpose of pre-screening. These soft inquiries do not have any effect on your credit score.

Credit-Based Insurance Score Factors

Credit-based insurance scoring is an effort to determine how much of a risk a customer would be and that credit score affects car insurance rates.

Negative Factors

The factors that go into the insurance company’s credit assessment vary between companies, but the following are examples of the factors that can hurt your insurance score:

  • History of late or missed payments
  • Too much credit used
  • Applying for many new credit accounts
  • Short credit history
  • Accounts in collections

Positive Factors

Not surprisingly, good credit indicators are the reverse:

  • Haven’t used too much credit
  • Haven’t been applying for new credit lines
  • You have a lengthy credit history
  • None of your accounts are in collections

These kinds of factors, both good and bad, are placed in the company’s credit-based insurance score formula, ultimately assisting in setting the premium costs.

Information Considered but Not Used in Scores

When looking at your accounts, insurance companies might also look at personal information which is not factored into the credit-based insurance score. These include:

  • Sex
  • Age
  • Marital status
  • Zip code
  • Income

Insurance companies also usually consider auto-related details such as:

  • Zip code
  • Age, make and model of the vehicle
  • Miles driven annually
  • Accident or claims history

 How Credit Score Affects Car Insurance by State:

State Average Premium Fluctuation Min. Premium Fluctuation Max. Premium Fluctuation
AK 28% 0% 64%
AL 71% 0% 116%
AR 62% 0% 131%
AZ 91% 33% 127%
CA 0% 0% 0%
CO 87% 0% 161%
CT 62% 0% 123%
DC 69% 0% 212%
DE 75% 62% 103%
FL 54% 0% 111%
GA 84% 0% 138%
HI 0% 0% 0%
IA 42% 0% 80%
ID 57% 0% 133%
IL 74% 1% 139%
IN 54% 0% 133%
KS 44% 0% 76%
KY 52% 0% 155%
LA 60% 0% 135%
MA 0% 0% 0%
MD 41% 2% 95%
ME 65% 0% 126%
MI 92% 85% 113%
MN 87% 0% 186%
MO 87% 0% 138%
MS 67% 0% 151%
MT 27% 0% 54%
NC 42% 0% 107%
ND 79% 0% 157%
NE 84% 68% 134%
NH 69% 7% 169%
NJ 102% 60% 139%
NM 37% 0% 79%
NV 42% 0% 69%
NY 47% 0% 136%
OH 83% 0% 133%
OK 78% 0% 138%
OR 83% 5% 160%
PA 89% 0% 164%
RI 41% 0% 127%
SC 57% 27% 87%
SD 67% 0% 133%
TN 88% 0% 124%
TX 91% 35% 129%
UT 77% 0% 147%
VA 97% 55% 162%
VT 47% 0% 155%
WA 50% 0% 94%
WI 91% 46% 143%
WV 52% 0% 126%
WY 69% 0% 151%

The five major auto insurance companies use credit data in 81% of the states in which they operate, on average.

Company States Not Affected By Credit Inactive In/Online quote unavailable States Affected By Credit
State Farm 2 5 44
Geico 35 3 13
All State 3 2 46
Progressive 3 0 48
Farmers Insurance 2 16 33

Source: WalletHub credit score & car insurance report

As you can see from the chart above, different insurers look at credit-based insurance factors in different ways. Some companies might look at extenuating circumstances and decide not to give a credit score as much weight, for instance.

 How Credit Score Affects Car Insurance by Company:

Car Insurance Company How Much Excellent Credit Saves You
GEICO 20%
Progressive 43%
Allstate 44%
State Farm 44%
Farmers Insurance 54%

Source: WalletHub credit score & car insurance report

What to Do If the Premiums are Too High

If your credit is poor enough to bump your premium costs up too much or you are denied insurance coverage altogether, you still have some recourse. Here are three approaches.

Talk to the Insurer

If any or all of your negative credit history is the result of special circumstances, explain this to the insurer. Some of the circumstances include:

  • Death of a loved one
  • Serious illness
  • A negative natural event, such as a fire
  • Divorce

Some insurance companies might reconsider your credit in a more favorable light and bring your premium costs down.

You should also ask if the insurers have a program to help that might help improve your premium.

 Consider Several Insurance Providers

Although using credit information when setting your premium rates is legal in all but three states, keep in mind every insurance company is different and some don’t put as much weight behind this score. Speak with several providers and try to determine which company puts the least emphasis on your credit.

Obtain an Assigned Risk Plan

These plans, available in most states, help high-risk consumers secure coverage for a limited time. Unfortunately, rates are typically higher than regular policies. Consider getting an assigned risk plan if you need to avoid a lapse in coverage. In the meantime, you can do some more shopping around while you work to improve your credit.

How to Improve Your Credit-Based Auto Insurance Score

Basically, improving credit means you must practice good credit consistently. This is not a quick fix, but a long-term plan to stick to.

Your strategy is to:

  • Open accounts that are in good standing
  • Build a long credit history
  • Keep your credit use low

Actions include:

  • Make all payments on-time, and never late
  • Never let an account go to collections
  • Review your standard credit report to find any inaccuracies you can have removed
  • Pay down your debt so it’s not so high
  • Avoid applying for too many new credit accounts, because a high number of credit inquiries lowers your score

Review Your Credit Reports

Thanks to the Fair Credit Reporting Act (FCRA), you have the right to obtain your credit report for free. Look for any inaccuracies and contest them and have your credit history corrected. Most credit cards now offer free monitoring and keep you up to date with monthly credit score updates and tracking. You can also obtain the free annual credit history report every twelve months from all three of the nationwide credit bureaus: Experian, TransUnion and Equifax. If you ever find discrepancies, contest your report with one of the bureaus.

Make a Habit of Comparing Insurance Rates

At least once a year compare your current auto insurance rates with what other insurance companies would charge you. Get started online, where you can use the EINSURANCE online tool for requesting quotes.

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