Car insurance is a necessity for drivers, but it can also be a major financial burden, especially for those with less-than-perfect credit. Your credit-based insurance score (also called a credit-scoring model) has become an increasingly important factor in determining your auto rates. In this comprehensive guide, we’ll explore how your credit affects your car insurance, why insurers use credit-scoring, and some tips to potentially lower your rates.
How Credit Scoring Works for Auto Insurance
Major insurance companies like Allstate, GEICO, and State Farm all use credit-based insurance scores to help determine your premiums. Your credit report contains a variety of factors that insurers believe can influence your likelihood of filing a claim. Some of the most significant factors include:
- Payment history – Late or missed payments on bills like credit cards, loans, and utilities can negatively impact your score. Insurers see this as an increased risk.
- Credit utilization – Having credit cards or loans that are maxed out or close to the limit shows higher utilization, which suggests financial stress that could lead to claims.
- Credit accounts/inquiries – Having a limited credit history or too many recent applications for new credit (known as hard inquiries) both tend to lower scores.
- Types of credit – Different types of accounts like credit cards, retail accounts, installment loans, mortgages, etc. all factor in, with a variety of account types seen as lower risk.
- Derogatory marks – Bankruptcies, liens, judgments, or other negative items stay on your report for years and significantly drag down your score.
Your insurance company purchases your full credit report from one of the three major credit bureaus – Equifax, Experian, or TransUnion. Most utilize a standardized scoring model developed by Fair Isaac Corporation (FICO) to analyze over 10 years of your credit history and assign a 3-digit score. In general, scores between 630-680 are considered “fair” while 700+ is “good” or “excellent”.
How Credit Impacts Your Rates
The influence of your credit on rates depends on several additional factors, so let’s break it down:
State regulations – Some states like California do not allow insurers to use credit scores alone to directly determine rates, while other states give insurers more flexibility. However, nearly all states permit credit as a rating factor.
Insurance company – Not all carriers weigh credit equally – some may make only small adjustments while others make larger percentage increases to premiums for lower credit scores.
Age and marital status – Younger or unmarried drivers often see bigger rate increases for poor credit since insurers view them as higher risks overall. Established married drivers may get smaller credit-related rate changes.
Type of insurance – Credit has a larger impact on car insurance than homeowners or renters insurance for example. For auto policies, poor credit can potentially increase your rates anywhere from 20-50% or more compared to an equivalent driver with excellent credit.
Deductible amount – Choosing a higher deductible (amount you pay out-of-pocket for claims) may lessen the effect of your credit score on rates since you’re considered less of the risk of a claim overall.
To summarize, while credit is one element among many used to calculate auto rates, it has become a major rating factor that could significantly increase your costs if your credit score falls below average or has deficiencies like missed payments or collections. Small improvements can sometimes lower rates noticeably.
Why Insurers Consider Credit Scores
The key reason insurers use credit-based insurance scores is that research has shown a statistical correlation between credit history and the likelihood of future insurance claims or losses. Some specific findings that have been established include:
- Drivers with poor credit (low credit scores) file claims more frequently than those with higher credit scores, on average.
- Late payments or collections on credit indicate a higher probability of being late with insurance payments or allowing a policy to lapse.
- Financial problems reflected in credit may be an indirect indicator of other issues like stressed personal lives that could increase claim risks.
- A history of on-time bill payments suggests a conscientious personality type less likely to file questionable or fraudulent claims.
While credit is not a perfect predictor and exceptions exist, insurers argue they have a fiduciary responsibility to charge fair premiums based on objective risk-assessment measures. Using credit data allows some cross-subsidization where lower-risk drivers help offset the costs of higher risks. Of course, this approach also disadvantages many with credit issues outside their control.
The correlation is statistical but individual situations can vary significantly. Some industry critics argue credit should not be the sole deciding factor, but most experts agree it is a valid rating element when used judiciously as part of a holistic risk profile. Communication and appeal options are important consumer protections as well.
Improving Your Credit Score to Lower Car Insurance
Now that you understand how credit impacts auto insurance rates, here are some practical tips for improving your credit-based insurance score and potentially saving money:
Check your credit report for errors – Mistakes happen and fixed errors boost scores directly. You’re entitled to a free report annually from each major bureau.
Pay all bills on time – Setting up automatic payments and paying balances in full each month shows responsible financial behavior to improve your payment history over time.
Pay down credit card balances – High credit utilization ratios over 30% are a red flag, so aim lower if possible by making extra payments.
Become an authorized user on someone else’s account – piggybacking on long positive credit histories of others like parents boosts your average account age quickly.
Ask for goodwill adjustments – If disputes or errors cause legitimate late payments, requesting removal as a goodwill gesture can help.
Consider credit-building loans – Low-limit loans repaid on schedule signal you can manage credit responsibly to new insurers.
Shop around every few years – Once scores improve or accounts age positively, it may be worthwhile comparing renewal quotes.
Bundle policies – Auto + homeowners discounts leverage your positive payment history across different types of coverage.
Getting your credit in order takes dedication but following these guidelines can pay real dividends by possibly lowering insurance costs by 15-30% or more as you establish a strong positive payment record over time. Discuss any extenuating circumstances with your insurer as well.
Five Common Questions About Credit and Auto Insurance
This final section will explore some frequently asked questions regarding how credit impacts car insurance rates:
- Does medical or veterinary debt affect my auto insurance?
Medical bills generally do not negatively impact your credit-based insurance score unless they are sent to collections. Insurers are focused more on accounts showing on-time payments like credit cards, loans, utilities, and insurance premiums rather than isolated medical debts.
- Can I get car insurance without a credit check?
While a few smaller insurers may offer non-credit-based policies, most carriers now use credit-based insurance scores. The best options are typically applying with a parent or spouse as a second driver to average scores, bundling with homeowners, or shopping “high-risk” insurers willing to take on difficult profiles.
- Do credit scores drop drastically after one late payment?
No, one missed payment rarely causes a major credit score decline. It takes a pattern of missed/late payments over 6 months or more for very noticeable drops to occur as reported to insurers. Communicating issues upfront may prevent rate increases as well.
- How long do closed accounts stay on my credit report?
Closed accounts remain on your credit reports for up to 10 years from the closing date. However, they stop directly influencing your credit-based insurance score after 7-10 years depending on the individual reporting agency and scoring model used.
- Can I negotiate my auto rates due to poor credit?
While credit impacts rates automatically, it’s always worth a call to your insurer as circumstances change. You may qualify for lower-risk factors like usage-based/telematics policies or secure positive payment and accident history discounts over 6-12 months that offset some credit effects. Many insurers will also work with clients on payment plans in hardship situations.
Understanding how the credit scoring process works is valuable knowledge to help gain control over factors determining your car insurance costs. Making smart choices around responsible credit management pays dividends over the long run through lower auto insurance premiums.