The Impact of Credit History on Car Insurance Rates

Did you know that your credit history can affect how much you pay for car insurance? According to a 2023 analysis by Bankrate, drivers with poor credit pay an average of 97 percent more for full coverage car insurance than drivers with excellent credit1. That means you could be paying hundreds or even thousands of dollars more per year for the same coverage, just because of your credit score.

But what is credit history and how does it influence your car insurance rates? In this article, we will explain how credit history works, how it affects your insurance risk, how you can improve it, and how you can compare car insurance quotes based on your credit history.

What is credit history and how is it calculated?

Credit history is a record of how you have managed your financial obligations over time. It includes information such as your payment history, your debt level, your credit mix, your credit age, and your credit inquiries. This information is collected by the three major credit bureaus: Equifax, Experian, and TransUnion.

Based on your credit history, you are assigned a credit score, which is a numerical representation of your creditworthiness. The most common credit scoring models are FICO and VantageScore, which range from 300 to 850. The higher your score, the better your credit history.

How does credit history affect car insurance rates?

Car insurance companies use a different type of score called a credit-based insurance score to determine your car insurance rates. This score is similar to your regular credit score, but it weighs the factors differently based on how they relate to insurance risk.

Insurance risk is the likelihood that you will file a claim and cost the insurer money. Insurers use various factors to assess your insurance risk, such as your driving record, your location, your vehicle type, and your credit history. According to the Insurance Information Institute (Triple-I), studies have shown that there is a correlation between credit history and insurance risk2. Drivers with lower credit scores tend to file more claims and incur higher losses than drivers with higher credit scores.

Therefore, insurers use your credit-based insurance score as one of the factors to determine your premium. The higher your score, the lower your premium. The lower your score, the higher your premium. However, the exact impact of your credit history on your car insurance rates varies by state, insurer, and coverage level.

For example, according to NerdWallet’s 2023 rate analysis3, drivers with poor credit in New York pay the highest average rate for full coverage car insurance at $7,186 per year. That’s 288 percent more than drivers with good credit in New York who pay an average of $1,851 per year. On the other hand, drivers with poor credit in North Carolina pay an average of $1,127 per year for full coverage car insurance. That’s only 4 percent more than drivers with good credit in North Carolina who pay an average of $1,086 per year.

What are the pros and cons of using credit history as a factor in determining car insurance rates?

The use of credit history as a factor in determining car insurance rates has been controversial for many years. Supporters argue that it is fair and accurate because it reflects the actual risk that drivers pose to insurers. They also claim that it benefits consumers by encouraging them to improve their financial habits and by allowing insurers to offer lower rates to low-risk drivers.

Opponents argue that it is unfair and discriminatory because it penalizes drivers who have low incomes, limited access to credit, or who have faced financial hardships due to factors beyond their control. They also claim that it harms consumers by making car insurance unaffordable for many people who need it and by creating a cycle of debt and poor credit.

Some states have banned or limited the use of credit history as a factor in determining car insurance rates. These states are California, Hawaii, Massachusetts, and Michigan3. In these states, insurers must use other factors to calculate premiums, such as driving record, mileage, education level, occupation, or marital status.

How can you improve your credit history and lower your car insurance rates?

If you have a poor or average credit history and want to lower your car insurance rates, there are some steps you can take to improve your score over time. Here are some tips and strategies:

• Pay your bills on time: Your payment history is the most important factor in your credit score. Paying your bills on time and in full every month shows that you are responsible and reliable with your finances. It also helps you avoid late fees, penalties, and negative marks on your credit report.
• Reduce your debt: Your debt level is another important factor in your credit score. Reducing your debt shows that you are not overextended and that you can manage your credit well. It also helps you lower your credit utilization ratio, which is the percentage of your available credit that you are using. A lower ratio is better for your score.
• Check your credit report regularly: Your credit report contains the information that is used to calculate your credit score. You should check your credit report at least once a year to make sure it is accurate and complete. You can get a free copy of your credit report from each of the three major credit bureaus every 12 months at annualcreditreport.com. If you find any errors or discrepancies, you should dispute them with the credit bureau and the creditor as soon as possible.
• Avoid applying for new credit: Every time you apply for new credit, such as a credit card or a loan, the lender will make a hard inquiry on your credit report. This can lower your score temporarily, especially if you have too many inquiries in a short period of time. Unless you need new credit urgently, you should avoid applying for it until you have improved your score.

Besides improving your credit history, you can also lower your car insurance rates by considering other factors that affect your premium, such as:

• Your driving record: Your driving record reflects your driving behavior and history of accidents, violations, and claims. The cleaner your record, the lower your premium. You can improve your driving record by following the traffic laws, avoiding distractions, and driving defensively.
• Your location: Your location affects your premium based on the crime rate, traffic density, weather conditions, and insurance regulations in your area. The higher the risk of theft, vandalism, collisions, or natural disasters, the higher your premium. You can lower your premium by choosing a safer neighborhood, parking in a garage or a secure lot, and installing anti-theft devices on your vehicle.
• Your vehicle type: Your vehicle type affects your premium based on its make, model, year, safety features, and value. The more expensive, powerful, or rare your vehicle is, the higher your premium. You can lower your premium by choosing a vehicle that is cheaper to repair or replace, has a good safety rating, and has anti-lock brakes, airbags, and other safety features.

How can you compare car insurance quotes based on your credit history?

One of the best ways to find the best car insurance rates based on your credit history is to shop around and compare quotes from different insurers. Different insurers use different methods and criteria to calculate premiums, so you might find significant variations in rates for the same coverage level.

To compare car insurance quotes based on your credit history, you can use online tools and resources that can help you find the best deals for your situation. For example:

• You can use comparison websites that allow you to enter some basic information about yourself, your vehicle, and your desired coverage level and get quotes from multiple insurers in minutes.
• You can use online calculators that estimate how much you can save by improving your credit score or by changing other factors that affect your premium.
• You can use online reviews and ratings that provide feedback from other customers about their experiences with different insurers in terms of price, service, claims handling, and customer satisfaction.

Before you choose an insurer and sign up for a policy based on their quote, you should always read the fine print and understand the terms and conditions of the policy. You should also check the financial strength and reputation of the insurer to make sure they are reliable and trustworthy. You can use online sources such as AM Best , J.D. Power , or Better Business Bureau to find out more about an insurer’s financial stability and customer satisfaction.

Conclusion

Your credit history can have a significant impact on your car insurance rates in most states. Having a good credit history can help you save money on car insurance by lowering your insurance risk and qualifying you for lower premiums. Having a poor credit history can cost you money on car insurance by increasing your insurance risk and resulting in higher premiums.

However, you can improve your credit history over time by following some simple steps such as paying your bills on time, reducing your debt, checking your credit report regularly, and avoiding applying for new credit. You can also lower your car insurance rates by considering other factors that affect your premium such as driving record , location , and vehicle type .

Finally , you can compare car insurance quotes based on your credit history by using online tools and resources that can help you find the best deals for your situation . However , you should always read the fine print and understand the terms and conditions of each policy before signing up . You should also check the financial strength and reputation of each insurer to make sure they are reliable and trustworthy .

By following these tips and strategies , you can find the best car insurance rates based on your credit history and your needs. Remember, having a good credit history is not only beneficial for your car insurance rates, but also for your overall financial health and well-being.