Disclaimer: Big insurance questions require big insurance help. We’re here to provide you with some basic information and background to help you talk with an insurance advisor, but this should not be taken as official advice. Talk with a professional insurance advisor before making substantial decisions.
It can be a mystery why your car insurance rates are what they are. You might think it all comes down to your driving record or the kind of car you own.
While those factors certainly play a part, there’s a less obvious but equally significant player at work: your credit score. Many people don’t realize how much their credit health can influence their auto insurance premiums. This can lead to frustration when quotes seem higher than expected.
Understanding Your Scores: Credit Score vs. Credit-Based Insurance Score
To understand how your credit impacts car insurance, it’s helpful to know the difference between a standard credit score and a credit-based insurance score.
A standard credit score, like a FICO score, is what lenders use. Banks check it when you apply for a mortgage or a car loan to figure out how likely you are to pay back your debts on time. It’s a snapshot of your financial reliability.
A credit-based insurance score (CBIS), often just called an “insurance score,” is different. Insurers create this score using specific information from your credit report. Instead of predicting if you’ll pay back a loan, an insurance score predicts how likely you are to file an insurance claim and how expensive that claim might be. Insurers use this score, along with things like your ZIP code, age, vehicle type, and how much you drive, to figure out your risk level.
It’s important to remember that there isn’t one universal insurance score. Companies like FICO and LexisNexis create their own scoring models, so your insurance score can vary from one insurer to another.
Here’s a quick comparison of these two scores:
| Feature | Standard Credit Score | Credit-Based Insurance Score (CBIS) |
|---|---|---|
| Purpose | Predicts loan repayment likelihood | Predicts insurance claim likelihood and cost |
| Primary Users | Lenders (banks, credit card companies) | Insurance companies |
| Calculation Focus | Creditworthiness for debt management | Risk of future insurance claims |
| Impact | Interest rates, loan approvals | Insurance premiums, underwriting eligibility |
| Source Data | Information from your credit report | Information from your credit report |
| Uniformity | FICO is widely known; generally more standardized | Multiple proprietary models; varies by insurer |
How Insurance Scores Are Calculated
Credit-based insurance scores are typically three-digit numbers. While the exact methods vary by company, most models consider five main components from your credit report.
Payment History (around 40%): This is the most important factor. It looks at how consistently you’ve paid your bills on time. Late payments, missed payments, or accounts sent to collections can significantly lower your score. A history of on-time payments shows you’re responsible, which insurers often see as a sign of responsible behavior in other areas, like driving.
Outstanding Debt (around 30%): This factor examines how much debt you have, especially your credit utilization ratio (how much credit you’re using compared to your total available credit). If your balances are high and close to your credit limits, it can hurt your score. Keeping your debt low and not maxing out your credit cards is viewed positively.
Length of Credit History (around 15%): This considers how long you’ve had credit accounts open. A longer, established credit history generally leads to a better insurance score because it shows stability. If you have a new or “thin” credit file with limited history, your score might be lower.
Recent Pursuit of New Credit (around 10%): This looks at how many new credit accounts you’ve opened recently. Applying for several credit cards or loans in a short period can slightly lower your score. However, it’s important to know that checking your own credit report or getting insurance quotes are usually “soft inquiries” and don’t hurt your score.
Credit Mix (around 5%): This component considers the different types of credit you use, such as credit cards (revolving credit) and loans (like car loans or mortgages). A balanced mix can slightly improve your score, showing you can manage various forms of credit responsibly.
Things like bankruptcies, collections, or foreclosures can also negatively impact an insurance score.
It’s important to know that federal law, specifically the Fair Credit Reporting Act (FCRA), prevents insurance scores from including personal information such as race, color, national origin, religion, gender, marital status, age, income, occupation, or employment history. This rule is in place to ensure fair practices in insurance scoring.
Here’s a summary of the factors that contribute to a credit-based insurance score:
| Factor | Approximate Weighting | Description | Impact on Score |
|---|---|---|---|
| Payment History | 40% | Consistency of on-time payments for credit obligations. | Positive: Consistent on-time payments. Negative: Late payments, delinquencies, collections. |
| Outstanding Debt | 30% | Total amount owed relative to available credit (utilization ratio). | Positive: Low balances, low utilization. Negative: High balances, maxed-out credit. |
| Length of Credit History | 15% | Age of credit accounts (oldest account, average age). | Positive: Longer, established history. Negative: Short or "thin" credit file. |
| Recent Pursuit of New Credit | 10% | Number of recent applications for new credit (hard inquiries). | Positive: Limited new inquiries. Negative: Numerous new applications in a short period. |
| Credit Mix | 5% | Variety of credit types (revolving, installment loans). | Positive: Balanced mix of credit types. Negative: Lack of diversity in credit. |
| Prohibited Factors | N/A | Race, Gender, Age, Income, Nationality, Religious Affiliation, Disability, Marital Status. | Cannot be used in score calculation by law. |
Insurers believe that individuals who are responsible with their finances are likely to be responsible in other areas of their lives, which could mean safer driving habits and fewer claims. However, because insurance score models are often secret and vary by insurer, it can be hard for consumers to know exactly how to improve their specific insurance score. It’s usually best to focus on improving your overall credit health.
Why Insurers Use Credit Scores
The insurance industry states that there’s a clear connection between a person’s credit information and how likely they are to have insurance losses. Studies have consistently shown that people with better credit scores tend to have fewer and less expensive claims. On the other hand, lower credit scores are generally linked to more frequent and potentially more costly claims.
For example, one study found that policies with the lowest 10 percent of credit scores had an average relative loss ratio that was 53 percent higher than expected. For the highest 10 percent, it was 25 percent lower than expected. Insurers argue that using these scores helps them accurately assess risk and set “fair” rates. This means people who represent a higher risk pay more, and those who represent a lower risk pay less. This practice also helps insurers operate more efficiently, and these savings can sometimes be passed on to consumers.
While insurers say using credit scores leads to “overall savings,” data suggests that the main beneficiaries are consumers with strong credit histories. One study showed that 43 percent of policies received a discount because of credit scoring, while only 13 percent saw a rate increase. This indicates that the current system generally benefits those with good credit and can lead to higher costs for those with poor credit.
The Financial Impact: How Your Credit Score Affects Your Premiums
The impact of your credit health on car insurance premiums is significant. Higher credit scores generally mean much lower premiums, while drivers with poor credit typically pay considerably more.
For instance, drivers with poor credit (usually below 580) might pay an average of $4,644 per year for full coverage. In contrast, those with excellent credit (800 and above) might pay around $2,257 annually. This is a difference of $2,387 per year, meaning those with poor credit could pay more than double (a 106% increase) compared to those with excellent credit. Drivers with average credit (in the 580-669 range) might pay around $2,883 annually, which is $626 (28%) more than those with excellent credit.
The table below shows the average annual auto insurance premiums across different credit score tiers:
| Credit Score Tier | Representative Score Range | Average Annual Full Coverage Premium | Absolute Difference from Excellent Credit Premium | Percentage Increase from Excellent Credit Premium |
|---|---|---|---|---|
| Excellent | 800+ | $2,257 | N/A | N/A |
| Good | 670-739 | $2,638 | +$381 | +17% |
| Average | 580-669 | $2,883 | +$626 | +28% |
| Poor | Below 580 | $4,644 | +$2,387 | +106% |
These significant differences highlight the powerful influence of credit scores. The higher premiums for people with poor credit can be a heavy burden, especially for those already facing financial difficulties due to unexpected events like job loss or medical emergencies.
State-by-State Landscape: Credit Score Regulations in Auto Insurance
While most U.S. states allow insurers to use credit-based insurance scores, several have either banned or heavily restricted this practice. This results in a varied set of rules across the country.
States with outright bans on using credit information for auto insurance rates include California, Hawaii, and Massachusetts.
States with strict limitations or partial bans on the use of credit scores for auto insurance include Maryland, Michigan, Oregon, Utah, Colorado, Washington, and Nevada. Ohio also has specific prohibitions.
The specific rules vary by state:
California: Insurers cannot use credit-based scores or credit history for underwriting, rating, or setting auto policy rates.
Hawaii: Auto insurers cannot use credit ratings when setting underwriting standards and rating plans for premiums.
Massachusetts: State law strictly prohibits auto insurers from using credit information or credit-based insurance scores for setting rates, underwriting new policies, or renewing existing auto policies.
Michigan: Insurers cannot use credit information or a credit-based insurance score to deny, cancel, or refuse to renew an auto or homeowners policy. They also cannot use credit scores to determine auto rates, although credit information may be used for payment options.
Maryland: Auto insurers can use credit history to help determine the rate on a new policy, but they cannot use it to deny an initial application, cancel a policy, refuse to renew a policy, or increase premiums at renewal.
Oregon: Insurance companies cannot cancel or refuse to renew a policy based on credit. They can consider credit as a factor when initially offering a policy, but with limits on specific credit report information used for underwriting and rating.
Utah: Insurers can use credit information when initially underwriting an auto policy, but it cannot be the only factor in the decision.
Washington: A temporary three-year ban was put in place, stopping the use of credit scoring for auto, homeowner, and renter insurance rates.
Ohio: While insurers can use credit information, Ohio law prohibits them from using a credit-based insurance score to decide whether a policy will be issued or how much premium will be charged. However, it can be one of several factors for premiums.
Generally, in most states where credit scoring is allowed, regulators usually don’t permit it to be the sole reason for an underwriting or rating decision. This patchwork of regulations shows the ongoing debate between consumer advocates, who argue against penalizing individuals for non-driving factors, and the insurance industry, which emphasizes actuarial accuracy for financial stability.
A particular challenge arises for individuals with “no credit history,” often called “no hits” or “thin files.” While laws generally prevent outright denial of coverage for a lack of credit history, insurers can still charge higher premiums if their data suggests a higher likelihood of claims for such applicants. For example, policies with no available credit history have been seen to have an average loss ratio 7 percent higher than the overall dataset. This can put new entrants to the credit system, like young adults or recent immigrants, at a disadvantage, as they might face higher costs simply because they lack enough financial data.
Strategies to Improve Your Credit Score for Lower Premiums
Improving your credit health takes time and consistent effort. There’s no quick solution, as credit scores reflect payment patterns over a long period, with recent information having a greater impact. By focusing on fundamental financial habits, you can positively influence your credit-based insurance scores and potentially reduce your premiums.
Here are key strategies to improve your credit health:
Pay Bills on Time: This is one of the most effective actions you can take. Your payment history makes up a significant portion of both standard credit scores (around 35%) and credit-based insurance scores (around 40%). Late payments can severely damage your score, while consistent on-time payments are highly beneficial. Using payment reminders or setting up automatic payments can help.
Reduce Credit Card Balances and Keep Credit Utilization Low: The amount of credit you’re using compared to your total available credit (your credit utilization ratio) is crucial. Keeping your balances as low as possible, ideally below 30% of your available credit, shows responsible credit management and helps your score.
Maintain Older Credit Accounts: The longer your credit history, the better. Keeping older accounts open and using them occasionally can help lengthen your overall credit history. It’s generally a good idea to avoid closing long-standing accounts, as this can shorten the average age of your credit and negatively affect your score.
Limit New Hard Inquiries: Applying for multiple new credit cards or loans in a short period can result in “hard inquiries” that slightly lower your score. However, inquiries for insurance quotes are typically “soft inquiries” and do not negatively impact your credit score.
Diversify Credit Types: Having a mix of credit, such as credit cards and installment loans (like car loans or mortgages), can slightly improve your score. This shows you can responsibly manage different kinds of credit.
Negotiate with Creditors: If you’re struggling to make timely payments, reaching out to your creditors can be helpful. Many are willing to work with you on repayment plans or more favorable terms. Addressing issues proactively can prevent delinquencies and further damage to your score.
Become an Authorized User: If someone you trust with good credit adds you as an authorized user on their well-managed credit account, it can help boost your credit score, as long as both you and the primary cardholder maintain the account in good standing.
Regularly Check Credit Reports for Errors: Credit bureaus can make mistakes. It’s essential to monitor your credit reports from Experian, Equifax, and TransUnion for any inaccuracies. Errors can negatively impact your score, so promptly identifying and disputing them is crucial. Checking your own credit report is a “soft inquiry” and doesn’t harm your score.
These strategies for improving your credit score are not just about getting better loan terms; they also reflect broader financial discipline and responsibility. Adopting sound financial habits leads to better credit, which in turn can lead to lower insurance premiums. These savings can free up disposable income, potentially further improving your financial stability. Thinking about your credit score as a key indicator that affects various aspects of your financial life, including insurance, can encourage a more comprehensive approach to personal finance.
Navigating Challenges: Insurance Options for Bad or No Credit
While a lower credit score often means higher insurance premiums, you still have options. Some insurers might offer more competitive rates for people with poor or limited credit than others. Companies like GEICO, Travelers, Nationwide, and Progressive are often mentioned as providing more affordable choices for this group.
Some providers also offer coverage without checking credit scores, often through pay-per-mile or usage-based insurance (UBI) programs. These innovative programs shift the focus from your credit history to your actual driving behavior or how much you drive.
Understanding the link between your credit score and car insurance can empower you to make informed decisions and potentially save money.