Your credit history is one of the many factors a car insurance company considers when calculating your policy premium. Simply put, people with average or above-average credit can usually expect to pay less (with all other factors equal) than those with poor credit. Let's look at why insurers look at your credit, how much your credit might affect what you pay for a policy, and how you can mitigate your credit’s impact on your insurance.
Your credit history affects your car insurance premium
Your car insurance company uses various data points to predict the likelihood you’ll file a claim, and how much money that claim will cost. Your insurance premium reflects that prediction. Some of the information the insurance company uses makes a lot of intuitive sense: the kind of car you drive, your driving and violation history, where you live, and how much experience you have behind the wheel.
What might be surprising is that your credit history is one of the most important pieces of information that goes into this prediction. In fact, your credit history can have a significant impact on what you pay for car insurance.
How much does your credit affect your car insurance premium?
By comparing premiums from 12 leading insurers for a person with average credit and a person with poor credit, researchers have found premiums increase for people with poor credit. Those increases range from 27% to 118%, depending on the insurer, with an average increase of 59%.
That’s right! A person with poor credit might pay 118% more than a person with average credit!
What does credit have to do with car insurance?
A long time ago, insurance companies figured out that there’s a strong correlation between how a person uses credit and their likelihood of filing a car insurance claim. Simply put, drivers with a more favorable credit history are less likely to file claims than those with a poor credit history. This correlation has been confirmed through multiple independent studies over the years, including research by the University of Texas at Austin and by the Federal Trade Commission.
The use of credit history to help calculate car insurance premiums has thus become commonplace in the industry. And when an insurance company can predict more accurately that a driver will have fewer or no claims, they can offer that driver a lower premium.
According to Fair Issac Corporation (FICO), 95% of insurance companies now use credit to calculate car insurance premiums.
How do car insurance companies use credit?
When you get a car insurance quote, you do two things to help the insurance company access your credit. First, you provide your Social Security number. Second, you provide consent for the company to get your credit information to help calculate your premium. You may be able to get a preliminary quote from some insurance companies without providing this information. But if they use credit in their premium calculations, they’ll require your Social Security number and consent before you buy your policy.
The insurance company will typically reach out to a third-party provider of consumer information such as FICO or Lexis-Nexis. These providers use consumer credit data to calculate your “insurance credit score.” This score might take into account your outstanding debt, length of credit history, late payments, collections, bankruptcies, and type of credit used. With your insurance credit score in hand, the insurance company will calculate your premium.
Note that your insurance credit score is not the same as your consumer credit score — the score banks or other lenders use when deciding whether to approve you for a loan. The insurance credit score looks at different information and uses that information differently than your consumer score.
Credit is a powerful factor, but it isn’t the only factor
While credit is usually an important factor in determining what you pay for car insurance, it’s not the only factor.
Insurance companies look at a wide range of information, besides credit history, to help calculate your premium. This may include any of the following:
- Your car's year, make, and model
- Whether you finance, lease, or own your car
- How you use the car (business, pleasure, etc.)
- How many miles you drive in a year
- Your address
- The names of any other drivers in your household
- Your driving record (confirmed by your state’s department of motor vehicles)
- Your claims history (confirmed by third-party consumer reports)
How to limit the negative impact of your credit history
If you suspect a poor credit history is causing you to pay more for car insurance, there are a few things you can do.
- Make sure your credit history is accurate. Every year, you can get a free copy of your credit report from each major consumer credit bureau. Once you have your report in hand, review it carefully to ensure there are no mistakes. If you do spot any errors, contact the credit bureau.
- Take steps to improve your credit. Making payments on time, avoiding opening new accounts, and keeping your credit utilization rate low are some of the credit-improvement tips from Equifax.
- Shop around for insurance. Regardless of your credit, you owe it to yourself to shop around for car insurance every couple of years. Premiums can vary by hundreds of dollars between companies. Get quotes from four or five insurers online, or enlist the help of an independent agent or broker.
FAQs
Does getting a car insurance quote affect your credit score?
When calculating your premium, the car insurance company performs a “soft pull” of your credit information that does not impact your credit score. This is different from the “hard pull” a lender performs when you apply for a mortgage (or other loan), which may indeed affect your score.
Is the use of credit in car insurance allowed by law?
The use of credit in car insurance is legal in most states. However, the practice has been controversial over the years. Consumer advocates charge that it unfairly puts people who are more likely to have a poor or no credit history at a disadvantage.
Because of this and other criticisms, California, Hawaii, and Massachusetts forbid insurers from using credit in car insurance, while several other states have laws limiting its use.