How does your credit score affect your car insurance rates?

Rachel Hartman

Your age, the type of car you drive and how many miles your vehicle logs each year can influence how much you pay for car insurance. However, another factor, can play a substantial role: your credit score.

Your credit score is used to help predict factors such as how likely it is that you’ll make payments on time, according to the Federal Trade Commission. Some insurance companies also use this information to help predict the likelihood of you filing an insurance claim, and even the amount of the claim.

Overall, when it comes to credit and car insurance, “the better your credit score, the better your rate is going to be,” says Beverly Harzog, a consumer advocate and credit card expert.

Who uses credit scores

By and large, most states allow insurance companies to use credit scores when setting car insurance rates. Three states – California, Massachusetts and Hawaii – do not let insurance companies use a consumer’s credit information for car insurance.

In the states where companies are permitted to consider a consumer’s credit, the majority of insurers take into account a consumer’s credit score for car insurance, says Rachel Jensen, associate counsel at the American Insurance Association, a trade organization.

Each insurance company uses its own system to develop a credit score. To do so, the company takes information from your credit report, such as if you pay bills on time and how many accounts you have. The company then gives points in each of these categories. The total number of points equals your credit score.

If you’re looking at getting an car insurance policy with a certain company and want to know whether that company uses credit scores to determine rates, you can call the company and ask. You also can contact your state insurance department to learn whether a company uses credit scores as a factor to determine car insurance rates, Jensen says.

Credit scores and car insurance rates

Here are four additional factors to be aware of when it comes to credit scores and car insurance rates.

1. A low score may mean higher rates.

If you have a bad credit score, an insurance company might be concerned about your ability to make payments on time. “They see that as a bigger risk for them and, as a result, your premium payments might be higher,” Harzog says.

If you have a low score, you could pay two, three or even four times as much for car insurance, says Birny Birnbaum, executive director of the Center for Economic Justice, a nonprofit organization that advocates for low-income and minority consumers. So if you have a high credit score and pay $800 a year for car insurance, that number might change to $1,600, or even more, with a low score.

2. Different companies use different scores.

When you apply for car insurance, the insurance company will pull your credit history and run it through the scoring model, Birnbaum says. Since insurance companies use different methods to find a credit score, the score you get from one insurance company most likely will differ from the one you get from another.

“Most insurance companies will use a tier rating system,” says Jonathan Peele, president of Coastline Insurance in Southport, North Carolina.

This means the company will set certain rates for different types of risks. Your credit score, as well as factors such as your driving record, all will be taken into account when determining that level of risk.

3. An accurate report is key.

Since most insurance companies use credit scores when setting car insurance rates, you’ll want to make sure the information that goes into that score is correct. You can order a free annual credit report at www.annualcreditreport.com.

“We suggest consumers check credit reports at least annually for accuracy,” Jensen says.

If you spot any errors, request that changes be made. Once the mistakes have been corrected, you can ask your insurance company to use the updated report to determine a new rate. That new rate could go into effect right away or within a certain time period, Jensen says.

4. You may be able to negotiate.

Certain factors can affect your score that have nothing to do with whether you’re financially responsible, Birnbaum says. If you pay bills on time, such as rent and utilities, but those companies don’t report to a credit bureau, that history of on-time payments may not be reflected on your credit report.

If you think your credit score doesn’t accurately reflect your overall financial picture, talk to your insurance company and ask about the possibility of lowering your current rate. If that isn’t possible, shop around, Harzog says. Other insurers may look at your credit score differently or may be willing to negotiate. 

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