How Your Credit Score Affects Your Car Insurance Premium

Most drivers know that speeding tickets and accidents can raise their car insurance rates. Yet fewer realize that their credit score plays a significant role in how much they pay, even if they have a spotless driving record.

What Is a Credit-Based Insurance Score?

A credit-based insurance score is different from the credit score your lender uses when you apply for a loan. Insurance companies use a version specifically designed to predict the likelihood that a policyholder will file a claim. This particular score draws from many of the same data points, including payment history, outstanding debt, length of credit history, and the types of credit accounts you carry. However, the score is weighted differently than a traditional FICO score.

There is discussion about whether a valid connection exists between credit and insurance risk and it is a subject of ongoing research. However, according to the Federal Trade Commission, a comprehensive study found that credit-based insurance scores are indeed effective predictors of risk under automobile policies. This supports insurers arguments that drivers with stronger credit profiles tend to file fewer claims, which justifies offering them lower premiums.

How Big Is the Impact?

The premium difference can be substantial. A 2023 study by Consumer Reports found that drivers with poor credit paid significantly more for car insurance than drivers with excellent credit. In some states the difference was more than double the rate for the same coverage. It is important to note that the impact varies by state. Some states, including California, Hawaii, and Massachusetts, have enacted laws restricting or prohibiting the use of credit in insurance pricing.

What You Can Do

The good news is that your credit-based insurance score is not fixed. Paying bills on time, reducing outstanding balances, and avoiding unnecessary new credit inquiries can improve it over time. Many insurers will re-evaluate your rate at renewal, meaning improvements to your credit profile can work in your favor.

It is also worth asking your agent whether your current insurer places heavy weight on credit scoring, because some carriers weigh it more than others. Comparing policies across multiple insurers can reveal meaningful differences in how credit affects your specific rate.

If you would like help reviewing your current auto insurance coverage and making sure you are getting the best rate available, contact our office today.