When you think about factors influencing your car insurance rates, your driving record, age, or even the type of car you drive might come to mind. But did you know that your credit score can also play a significant role in determining how much you pay for coverage?
While it may not seem directly related, insurance companies use credit-based insurance scores as a predictive tool to assess risk. Here’s a closer look at how your credit score impacts your car insurance premiums and what you can do about it.
WHY DO INSURERS USE CREDIT SCORES?
The practice of using credit scores in insurance pricing isn’t arbitrary. Insurers have found a statistical correlation between a person’s credit history and the likelihood of filing claims. A higher credit score indicates financial responsibility, which insurers equate with a lower risk of filing frequent or costly claims.
Credit-based insurance scores are not the same as the credit scores lenders use for loans. Instead, these specialized scores consider specific factors like payment history, debt levels, and credit inquiries, excluding personal details such as income or employment status.
HOW DOES YOUR CREDIT SCORE AFFECT YOUR INSURANCE RATES?
Here’s how your credit score can impact your car insurance premiums:
High Credit Score
Drivers with excellent credit typically qualify for the most favorable rates. Insurers view them as low-risk customers, making them less likely to file claims.
Average Credit Score
A fair or average credit score might result in moderate premiums. While you’re not considered high-risk, there’s still room for improvement.
Low Credit Score
Drivers with poor credit may see significantly higher premiums. Insurers perceive them as more likely to file claims, so they offset that risk with higher costs.
In states where this practice is allowed, the difference between premiums for drivers with excellent credit and those with poor credit can be substantial.
STATES WITH RESTRICTIONS ON CREDIT SCORE USE
Not all states allow insurance companies to factor credit scores into their pricing models. California, Hawaii, and Massachusetts, for instance, have prohibited the use of credit scores in determining car insurance rates. If you live in one of these states, your premiums are calculated based on other factors like driving history, vehicle type, and location.
WHAT FACTORS IN YOUR CREDIT HISTORY ARE CONSIDERED?
To understand how your credit score influences your insurance rates, it helps to know which parts of your credit report insurers pay attention to:
1. Payment History: Do you consistently pay your bills on time? Late payments can be a red flag for insurers.
2. Credit Utilization: This measures how much of your available credit you’re using. Keeping your credit utilization low (ideally below 30%) reflects positively on your creditworthiness.
3. Length of Credit History: A longer credit history often works in your favor.
4. Debt-to-Income Ratio: While this isn’t directly factored into your credit score, a high level of debt can still impact your insurance score.
5. Number of Hard Inquiries: Frequent credit applications may signal financial instability, which insurers might view as a higher risk.
HOW TO IMPROVE YOUR CREDIT SCORE & LOWER YOUR PREMIUMS
If your credit score contributes to higher car insurance rates, don’t worry – it’s not permanent. By taking proactive steps to improve your credit, you can work toward more affordable premiums.
1. Pay Bills on Time: Your payment history accounts for a significant portion of your credit score, so make timely payments a priority.
2. Reduce Credit Card Balances: Lowering your credit utilization ratio can quickly boost your score.
3. Check for Errors on Your Credit Report: Mistakes happen. Review your credit report regularly to ensure all information is accurate.
4. Avoid Opening Too Many New Accounts: Each hard inquiry can slightly lower your score, so only apply for new credit when necessary.
5. Maintain Old Credit Accounts: Keeping older accounts open can help increase the length of your credit history.
ARE THERE OTHER WAYS TO SAVE ON CAR INSURANCE?
While improving your credit score is a long-term strategy, there are other ways to reduce your car insurance premiums in the meantime:
- Shop Around: Rates can vary widely between insurers, so compare quotes to find the best deal.
- Bundle Policies: Combining auto and home insurance with the same provider often comes with discounts.
- Take a Defensive Driving Course: Many insurers offer discounts for completing a certified course.
- Ask About Discounts: Whether it’s for a clean driving record, low mileage, or being a member of certain organizations, insurers offer a variety of discounts that could apply to you.
Your credit score is just one piece of the puzzle when it comes to determining car insurance rates, but it’s an important one. By understanding how it factors into your premiums and taking steps to improve your score, you can position yourself for better rates over time.
Improving your credit score might take time, but every small step you take is a move toward better financial health – and potentially lower insurance rates. Why wait? Start taking control today.
If you need help finding the best car insurance coverage for the best price, speak to a SimplyIOA agent at 833.872.4467 or get an auto insurance quote online now.
