How Credit Scores Impact Car Insurance Rates

How's your credit score? Insurers may be using your credit score to set your car insurance rates. Learn how they do it here.
Man checking his credit score.

Your credit score is important in many walks of life. Getting a loan for your house, leasing a car, or applying for a credit card are all times where your credit history plays a crucial role. But your credit score can also impact your auto insurance rates. The worse it is, the higher your rates may be.

Insurers use many factors to determine your rates. These factors are usually small facts about you and your driving history. These help insurers assess your risk as a customer and driver. Your credit history is a major factor that insurers consider. Other common rate factors include:

  • Age
  • Gender
  • Marital status
  • Driving record
  • Type of car that you drive
  • Car mileage
  • Where you live

You should note that some states don’t let insurers use your credit score as a rate factor. This is because there’s a debate about the fairness of using credit as a major car insurance rate factor over others, such as your driving record or claim history. The states that don’t allow or limit insurers’ use of your credit are:

This article will equip you with the basics of credit scores as an auto insurance rate factor. This includes the following key information:

  • Why insurance companies use them
  • How insurance companies use them
  • Credit score vs. insurance score
  • Why some states don’t allow this practice
  • How to raise your credit score

Why Insurance Companies Use Credit Scores

Credit card companies and banks use your credit score to see how reliable you’ll be. Similarly, insurance companies will use your credit history to decide if you’ll be reliable in paying your monthly rates. If your credit is poor, it may indicate that you won’t pay your rates on time.

Lower Credit Scores May Mean a Higher Likelihood of Accidents

Per the Insurance Information Institute (III), there’s research to suggest that having a lower credit score shows a high potential for getting into an accident. This is because low credit scores display less financial and personal responsibility. Insurers use your credit score because of these statistics. They also do it because of how reliable (or unreliable) it paints you as a customer.

How Insurance Companies Use Credit Scores

Insurance companies use your credit rating as a way to determine how much you’ll pay for coverage. They use it to determine your risk. If all of the rate factors and data point to you being more of a liability, you’ll either not be able to buy insurance or your rates will be very high.

Extremely low credit scores will likely result in you having high rates. Your insurer may also label you as a high-risk driver because of this. This usually means you’ll need to get a non-standard insurance policy instead of a regular one.

Credit Score vs. Insurance Score

There are two types of scores that many people refer to when talking about credit and insurance. Your credit score and insurance score. You may also see insurers call an insurance score a credit-based insurance score. This can cause plenty of confusion if you’re researching the two terms.

Below are definitions for each term and the differences between them:

Credit Score

A credit or FICO score is a number that generates based on a credit report. Your credit report will show information about your previous loans and accounts with lenders. Lenders, such as banks and credit card companies, audit your credit score before giving you any money.

Credit-Based Insurance Score

Insurers will usually use a credit-based insurance score to help determine your rates. They’re meant to predict future insurance losses. If yours shows that you’re at a high risk to produce losses or file claims, your rates are likely to be high. Several different companies produce these scores for insurers to access and use.

Here’s what usually makes up a credit-based insurance score:

  • Payment history. This shows all of the payments you’ve made in the past and whether you’ve been reliable in making them. Insurers refer to not making payments as delinquencies in your credit.
  • Current debt. This will show how much outstanding debt you currently have.
  • Recent credit. The amount of credit you’ve applied for or received recently.
  • Length of history. How long your credit history has been. This also shows the length of each line of credit that you’ve had.
  • Credit type. This will show the type of credit you’ve had in the past (e.g., credit cards, loans, mortgages, car leases).

Insurers will use the information above to determine your rates. They’ll also use it to assess whether they want you as a customer or not. It’s important to note that insurers will never factor your age, gender, marital status, ethnicity, address, and income into your credit-based insurance score.

Why Some States Don’t Allow Insurers to Use Credit

The practice of using credit scores as an auto insurance rate factor is a widely debated subject. Many feel the use of these in the insurance industry is unfair. For this reason, some states don’t allow insurers to use your credit history as a rate factor.

One reason why people believe using your credit score is unfair is that it doesn’t necessarily show you’re going to get into an accident. It also doesn’t exactly relate directly to insurance as much as, say, your driving record would. Drivers with a poor credit rating and a clean driving record could end up paying much more than those with the opposite. This causes some states to steer away from this practice.

While some states don’t allow insurers to use your credit score, they limit or prohibit it in different ways. Here’s a list of each state that prohibits or limits using your credit score for insurance and how they do it:

California

Your credit score won’t affect your rates in The Golden State. California doesn’t allow insurers to factor your credit score into how much you pay for home or auto insurance. They also don’t let insurers use your credit history to make underwriting choices. This includes deciding to cancel or deny you a policy based on your credit rating.

Hawaii

Like California, Hawaii bans insurers from using your credit score as a car insurance rate factor. They also ban insurers from using it to make any underwriting decisions, such as canceling or denying your policy. But keep in mind that they do let insurers use it to make decisions for home insurance.

Maryland

Maryland allows insurance companies to use your credit score as a rate factor. But they forbid insurers from using your credit rating as a way to make any underwriting decisions. In other words, they can’t refuse to sell you insurance because of your credit score, but your rates may be much higher if the rating is low.

Massachusetts

In Massachusetts, your credit score isn’t a factor in determining your car insurance rates. Just like many of the other states on this list, insurers in Massachusetts can’t use your credit history as a way to cancel, deny, or non-renew your policy.

Michigan

Michigan bans insurers from using your credit rating to help select your insurance rates. Providers also may not prevent you from buying insurance if your credit rating is low.

Oregon

Insurance carriers in Oregon aren’t able to use your credit rating to deny you insurance. But, unlike many of the other states on this list, Oregon insurance companies can use credit scores to determine your rates. Though, they’re only able to use certain info from your credit-based insurance report. Be sure to speak with your agent about what credit info your insurer can look at.

Utah

Utah allows insurers to use your credit score as an auto insurance rate factor. The difference in Utah is that it can only gain you a discount. It won’t cause your rates to rise. After you’ve been a customer for 60 days, your insurer can’t use your credit history as a way to deny, cancel, or non-renew your policy.

Washington State

On June 20, 2021, Washington state passed a law that bans insurers from using credit scores as a car insurance rate factor. This law is in effect for three years after the COVID-19 pandemic is officially over (the government would be the one to declare it as over).

Frequently Asked Questions

Q: How can I get a better credit-based insurance score?

A:  The best way to improve your credit score or credit-based insurance score is to maintain a level of financial responsibility. Here are the best ways to achieve that:

  • Don’t miss any payments
  • Have a long credit history with little to no mistakes. Show that you’re reliable.
  • Have current credit that’s in good standing with lenders.
  • Avoid outstanding debt if you can help it. More debt can put you even further underwater.

Q: Is your insurance score the same as your credit score?

A: The short answer is no. Your insurance score is a set of information about you and your credit history. Insurers use it to figure out how risky of a driver and customer you are. A credit score is simply a number that a credit report produces. The higher the number, the more reliable you are with handling credit.

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