Does Your Credit Score Affect Your Car Insurance Rates?

June 21, 2022

Your credit score seems to follow you everywhere. Today it’s not only lenders that look at it, so do employers, landlords, and even some insurance companies. So does your credit score affect your insurance rates? We explore the answer below.

Your Credit-Based Insurance Score

Insurance companies don’t pull your credit score like a lender would. Instead, they look at your insurance-based credit score. This score is slightly different because it doesn’t take into consideration the following:

  • Employment history
  • Income history
  • Address history

Credit-based insurance scores look at:

  • The length of your credit history (the longer the better)
  • The number of late payments or past due amounts
  • The number of good open accounts
  • The number of collections
  • The amount of debt you carry versus your credit lines
  • The number of recent credit inquiries

What can Hurt Your Credit-Based Insurance Score?

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Just like your regular credit score, certain habits can hurt your credit-based insurance score including:

  • Making payments late
  • Letting accounts go to collection
  • Having too much debt outstanding at one time
  • Having too many inquiries on your credit report

Why do Insurance Companies Care About Your Credit Score?

It seems crazy, right? Why would an insurance company care if you pay your Visa bill on time? But it all correlates. Studies show that consumers that have lower credit scores are more likely to be involved in an accident. This means a higher risk of claims for the insurance company.

Insurance companies use this information to determine your premiums. Typically, a person with a low insurance-based credit score will pay higher premiums to make up for the risk. Fortunately, your credit score isn’t the only thing insurance companies look at though.

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The Other Factors that Matter

Insurance companies look at a wide range of factors when determining your insurance premiums including:

  1. Your age
  2. Driving record
  3. Type of car you drive
  4. Claim history
  5. here you live

Insurance companies put all of the factors together when determining what premiums they should charge you. Of course, a few other factors play a role including the type of coverage you choose and the amount of your deductible.

In many cases, the higher the deductible you choose, the lower your premiums become. In addition, choosing only the coverage options you need and not paying for insurance you don’t need can help lower your premiums.

Increasing your Insurance Based Credit Score

It’s obvious that you need a good insurance-based credit score in order to get secure low premiums, so what can you do to increase your score? Basically, you need good credit habits, just as you do to get a new loan. Here are a few of the things you can do:

  • Keep all accounts in good standing; don’t pay your bills late
  • Keep all accounts open even if you don’t use them; it keeps your credit age ‘older’
  • Reduce the amount of outstanding credit you have compared to your credit line

They are the same principals you’d use if you wanted to get a new credit card or loan. You need to prove that you are financially responsible.

Finding the Right Premiums

Just like you’d shop for new appliances by going to multiple stores, consider the same with your auto insurance. If you have a low credit-based insurance score, you may have to do more shopping around than someone with a higher score.

Each insurance company has its own tolerance for risk. Some will allow low credit scores and make up for it with higher premiums or lower coverage amounts. Other companies won’t entertain the thought of lower credit scores, which is why it’s important to shop around and get quotes from multiple insurance companies.

The bottom line is that you need a good credit score to get any type of new credit or insurance. Your credit score follows you everywhere as it shows your level of financial responsibility. If you are in the market for car insurance, make sure you maximize your credit score before shopping in order to secure the lowest premiums.

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