How Your Credit Rating Impacts Car Insurance Costs: Explained

The connection between credit rating and car insurance cost might surprise many American drivers. Most people know that their driving record affects how much they pay for car insurance. But do you realize that the numbers in your credit report also play a major role? 

Insurance companies look at your credit score almost like a report card to see how well you manage money. They believe it helps them guess how likely you are to file a claim.

Do you know that drivers with poor credit can pay up to 115% more for car insurance? This is according to recent industry data. In contrast, those with excellent credit scores pay way less. Also, studies show that almost 95% of auto insurers use credit information to calculate premiums in states where it’s allowed. 

We’ll explore the relationship between credit rating and your insurance costs. And how it affects your wallet every month. Many Americans pay extra each year because of their credit scores. But once you understand how credit rating and car insurance systems work, you can save a lot of money.

Credit Rating and Your Car Insurance

For your credit rating to improve car insurance costs, look at five main things: 

• Your payment history.  It shows whether you pay bills when they’re due. 
• The amount of debt you’re carrying. Owing too much against your limits can lower your score. 
• Length of your credit history. Having credit accounts for a longer time helps. 
• New credit applications can affect your score. Applying for lots of credit at once might seem risky. 
• The mix of credit types you have, like credit cards, car loans, or mortgages, also plays a role

These factors will go a long way in improving your car insurance costs.

Credit-Based Insurance Score

What do insurance companies look at? They don’t use the same credit score you might see when applying for a loan. Instead, insurers use a credit-based insurance score. This score focuses on parts of your credit history that connect to insurance claims.

Now imagine your credit report is like a big book about your financial life. This book contains information about: 

• Whether you pay bills on time 
• How much money you owe 
• How long you’ve had credit cards 
• Whether you’ve had any serious money problems

Insurance companies use specific parts of this book to calculate your insurance score. So, even if two people have the same regular credit score, they might have different credit-based insurance scores.

Insurance Companies And Your Credit

Why does an insurance company look at credit in the first place? And does paying your credit card bill have something to do with getting into a car accident? Well, we’ll answer these questions. Insurers have done some research over the years, and findings link credit behavior to insurance claims.

The outcome points out that people who manage their credit well tend to file fewer insurance claims. In reverse, those with lower credit scores file more claims. Having a close look, you’ll realize that it’s not about being fair or unfair. But about math and patterns. 

Many consumer advocates disagree with this practice. They think it’s not right to charge people more based on their credit. But insurers relate credit rating to car insurance because they believe your credit reflects how responsible you are with money. 

Do you know that most times, someone who pays all their bills on time: 

• doesn’t max out credit cards 
• manages money well 
• might also be the type of person who drives with care 
• maintains their car well
• takes fewer risks. 

Meanwhile, someone struggling with debt and missed payments might face more stress. This could affect their driving or lead to more claims. Well, this is not always so because many things can hurt your credit. And they may have nothing to do with how careful you drive.

Read Also: How to Reduce Home Insurance Premiums: Best 7 Ways

How Your Credit Rating Affects Car Insurance Premium

How does a credit rating have an impact on your car insurance pricing? Well, it also depends on where you live and which company you choose. Sometimes, excellent and poor credit can differ in paying more for the same coverage on the same car.

Now, imagine two people with the same driving record. They are shopping for the same insurance coverage. The first person has an excellent score of above 800, while the second person has a poor score of below 600. Everything else may look the same, but the second person may pay a higher premium because of their credit score. 

Insurance companies weigh credit rating and car insurance factors in different ways. Some companies place heavy emphasis on credit scores. Others may consider it as one of many factors. This makes shopping around important if your credit is not good enough.

Which States Allow This Practice?

Let’s look at the states that DON’T use your credit rating to determine your car insurance costs. Currently they are:

• California 
• Hawaii 
• Massachusetts 
• Michigan

They either ban or restrict the use of credit rating for car insurance pricing. In these states, insurers must base their rates on your driving record, the type of car you drive, and how much you drive.

But in the other 46 states, insurers can use credit information to calculate your premium. Each state has different rules about exactly how it can use this information. For example, some states need insurers to prove that their credit-based pricing is fair and doesn’t discriminate.

How to Improve Your Credit for Better Insurance Rates

If you think you’re stuck with high insurance rates forever, think again. Improving your credit takes time, but it’s possible with effort. Besides, the benefits extend beyond lower insurance costs. You’ll also qualify for better rates on loans, credit cards, and even apartment rentals.

To improve your credit rating for a better car insurance rate: 

• Pay all your bills on time. Missing payments hurts what you’re building. Pay the least amount on time. It is better than paying late.
• Reduce the amount you owe on credit cards. Try to keep your credit card balances below 30% of your credit limit. 
• Avoid applying for new credit unless you need it. 
• Keep old credit accounts open even if you’re not using them much, because the length of your credit history matters for your credit rating
• Check your credit report for errors. Sometimes mistakes happen, and you might find accounts that aren’t yours or payments marked as late when you actually paid on time.

Read Also: What Affects Your Credit Score? 5 Key Factors Explained

What To Do When You Have Bad Credit

What if your credit isn’t good right now? Well, you still have options for getting affordable car insurance. When you have a poor credit rating, your car insurance costs will likely be high. But you can still save money by adopting these tips:

• Shopping around and getting quotes from at least five different insurance companies. 
• Increase your deductible to lower your premium. 
• Look for all available discounts that don’t depend on your credit rating for your car insurance. 
• Ask about payment plans.

You can improve your credit rating if it’s bad. But at first, the mindset shift needs to happen.

When To Expect Improvement in Your Credit Rating

You may be asking, “How long does it take to see improvement?” Well, patience is the key here. Changes to your credit rating don’t happen overnight. But you can start seeing some good results within a few months if you’re consistent with good habits.

Sometimes, some positive changes might happen within 30 to 60 days. For example, if you create a pattern of on-time payments, your score increases month by month. But noticeable changes usually take six months to a year or longer. 

If you’re rebuilding credit after bankruptcy, it might take several years to get back on track. But even a little improvement in your credit rating helps your car insurance costs. 

Many insurers review your credit rating every year when your auto policy renews. So, real changes in rate happen at renewal time, even when your rating improves before the period. Sometimes, switch to a new company that sees your improved credit. It saves you money right away.

Conclusion

When you know how credit rating and car insurance pricing work, it gives you power over your insurance costs. Does it appear unfair that your credit history affects your car insurance premium? Well, it allows you to take action. 

By leveraging the information here, you can reduce what you pay for insurance coverage. Your credit rating is one of many factors insurers consider in your car insurance costs. 

Your driving record, where you live, and how much you drive all matter too. Focus on the things you can control, like driving with care and maintaining good credit. Over time, these efforts will help in the form of lower premiums and improved finances.

Read Also: Common Credit Mistakes You Should Never Make Again