How Credit Score Affects Your Car Insurance Rates 

You went a few months between jobs and fell behind on some bills. You’re pretty much all caught up now, but you’ve just been given a cost quote from your insurer for auto coverage. It’s double what your friend’s paying the same company for the same level of coverage. So what gives? 

Are car insurance rates really based on credit scores? How does that work? How does a bad rating make your auto coverage more expensive? How often do car insurers check scores? And if it’s such an important factor, how can you get your numbers up to get auto insurance premiums down? 

The Connection Between Credit Scores and Car Insurance 

People everywhere have the same question when they get a surprise quote or renewal for auto coverage: Why is my car insurance going up? 

One reason could be your credit score. Insurers like to point to studies that show drivers with higher numbers tend to file fewer claims. For an insurance company, that is a statistical fact and explains their preference for policyholders with higher scores. 

All companies assessing a potential customer assume that higher-scoring policyholders are less likely to be late with premium payments than those with lower scores. Put those two calculations together and you see why insurers prefer higher numbers — and show their preference with lower rates on their auto coverage. 

Busting Myths 

The insurance industry’s practice of using these scores to decide coverage rates and acceptability is called credit-based insurance scoring. One myth is that all insurers use the same scoring mechanism. They don’t. You might have a rating that earns you a poor overall grade at one insurer but is acceptable at another. 

Therefore, one strategy is to have an independent agent on your side who can search among various insurers for one that will penalize your rating less than others will. 

Another myth suggests your credit-based insurance score alone can doom your goal of finding affordable auto coverage. There are other factors that insurers also take into consideration, including your driving record and claims history, that weigh more. Also, a good independent agent can steer you toward affordable car insurance for drivers with bad credit. 

The point is, your score is important for rate calculations — but it’s not the only factor. In addition, while most insurers consider these scores at various rates of importance, some don’t use them at all. In four states, it is currently against the law for insurance companies to use an applicant’s credit score to play a part in their policy costs: California, Hawaii, Massachusetts and Michigan. In 4 other states, insurers may use credit scores to determine rates, but they cannot use them as a reason to reject or cancel policies: Maryland, Oregon, Utah, and Nevada. 

Understanding Your Score Composition 

That number is a history of your financial responsibility. It will include bills you paid, those you were late on, and those you failed to pay back at all. 

Reporting agencies, such as TransUnion, Equifax, and Experian, will also score you on the likelihood that you will experience financial problems in the future, based in part on how much you owe your creditors. 

The length of time your accounts are open is another important calculation point. If you’ve only had credit accounts for a year, but you’ve been hit with three late bill payments over that time, this will create a bigger hit on your record than if you had the same number of late payments but over a period of 30 years. 

How Insurers Use Your Credit Information 

When you apply for coverage, the insurance company begins the process of calculating whether they should accept you as a policyholder and how much they should charge you if they do. 

They’ll look into numerous factors that affect car insurance rates, including your driving record, your record of making claims from other insurers, and even where you live. 

They’ll also examine your so-called credit-based insurance score, a number that is formulated based on the importance the insurer gives your scores. An identical ranking can result in a different credit-based insurance score from two different insurance companies. 

Typically, insurers will do their calculations when you first apply for coverage and when it comes time to renew your policy. 

Balancing Act: Financial Health and Insurance Affordability 

It’s a simple, though possibly not always fair, calculation: Those with the best handle on their finances usually have higher scores and, therefore, earn lower rates on their car insurance. To put it another way, those who can afford it least often pay the most for their policy. 

Once you know that fact, you at least know how to try to get lower rates. Do all you can to bring up your numbers. 

Strategies to Counter Negative Credit Impacts on Insurance Costs 

Your best opening strategy for improving your credit score is to make sure you pay your bills on time — even if that means taking a second job until you can get your finances in better order. 

There are other strategies as well. Get your credit card balances down, and ask your card providers to increase your limit. This last tip will make your card balance a lower percentage of your limit. Also, keep an eye on your report and inform the agencies of any errors that bring down your score. 

These and other strategies can improve your score and reduce what you’ll pay in the future for your car policy. But another strategy is to avoid insurance companies that use scores to calculate their rates. An independent auto insurance agent can help you in that regard by shopping for coverage from insurers who will minimize the impact of your score on your premium. 

Get an Affordable Quote from Acceptance Regardless of Your Credit Score 

One key advantage you have as a policyholder through Acceptance Insurance is your agent. Your independent Acceptance agent doesn’t work for just one insurer. They’ve struck up contractual relationships with several brand-name carriers. That means your agent can find coverage from quality auto insurers who might place less emphasis on your credit history. 

You’ll also learn how other factors can get you better rates. For instance, you might bundle your auto coverage with the same company that provides your renters, homeowners, life insurance, or other types of coverage. You can earn discounts that way. This is just one strategy your Acceptance agent might recommend to help reduce rates and offset the impact of a poor credit report. 

You’ll never know how affordable your auto coverage can be until you contact us. Simply call Acceptance Insurance at (877) 405-7102 or get a quick online quote. You can also find an office near you and discuss your cost options with one of our agents. 

FAQs — Clarifying Common Concerns 

Here are brief answers to some common questions consumers have regarding the effect of credit scores on the auto coverage rates they’ll pay. 

Do All Car Insurance Providers Factor in Credit Scores? 

No, but most do. That includes almost all of the major brands, except in the four states where the practice of basing rates on credit scores has been prohibited: California, Hawaii, Massachusetts, and Michigan. Unless you’re a resident of one of those states, it pays to keep your numbers as high as possible for the best possible rates on your car policy, 

It should be noted, however, that not all car insurers use credit reports in the same way. A “poor” score that triggers a big rate increase for one company might not cause much of a stir at another insurer, only causing a slight premium bump. An independent agent — one who deals with multiple insurers — can help you find a company that places less emphasis on your score. 

Can Shopping for Car Insurance Hurt Your Credit Score? 

No. The idea behind the question is that when you make a rate request, the insurer will tap your credit report to find your rating. And too many of these information requests from insurers will penalize you. 

Don’t worry about it. What’s known as a hard check can indeed lower your score. A hard check is what companies perform when you’ve applied for a credit card or a loan. Too many of these checks is a red alert to the reporting agencies because it says you might be trying to spend a lot of money you don’t have. 

But inquiries made by insurers are what’s called soft checks. They won’t even show up on your report. 

Is It Possible to Obtain Car Insurance with a Poor Credit History? 

Yes. Your premium will almost certainly be higher than what motorists with better ratings pay, but you can find coverage. Also, keep in mind that not every insurer places the same level of importance on your score in their calculations. They all use different models to calculate your credit-based insurance score. Additionally, this calculation is only one factor that determines what you’ll be charged. 

How Often Do Insurance Companies Check Credit Scores? 

When you apply for coverage from an insurer, when that policy comes up for renewal, and when you switch coverage. 

What Is the Rationale for the Relationship Between Credit Score and Risk Assessment? 

Studies used by auto insurance companies have shown that drivers with higher credit scores file fewer claims than those with lower scores, and are therefore a better risk for the insurers. The presumption is that those with higher scores are more responsible overall. These studies allegedly show they’re less impulsive and more cautious and law-abiding as drivers, while those with poor scores might drive more carelessly, rack up more moving violations, get into more accidents, and therefore file more claims. 

Are There Exceptions Made for Individuals with Low Credit Scores Due to Extenuating Circumstances? 

Not usually, but it doesn’t hurt to bring up such extenuating circumstances as high medical bills or long job layoffs when explaining the drop. Also, remember that certain positive factors, such as an excellent driving record and a history of few, if any, insurance claims, might at least partially offset a poor credit history when your rates are calculated.