Banks and lenders use credit scores to determine how likely you are to pay back a loan on time. It’s a number that can help lenders learn more about your creditworthiness. While you may assume that your credit score will only affect you if you’re borrowing money, it can actually impact other things, including your car insurance rates.
A credit score, which is determined by credit history, can be any number between 300 and 850. Banks and lenders see people with higher scores as less risky and more likely to pay a loan. That means if your credit score is low, your car insurance rates are likely to be high and vice versa.
Does Your Credit Score Impact Your Car Insurance Rate?
Many insurance companies use credit scores as a factor when determining policy rates. According to national rate data, poor credit increases rates by as much as 61% compared to average credit. In other words, insurance carriers see drivers with bad credit as more financially risky, even if they have good driving histories.
The level at which credit scores affect insurance rates depends on the state in which you live. Massachusetts, Hawaii, Washington, and California forbid using credit scores to set insurance rates. The argument is that using a person’s credit score may expose certain drivers to unfair practices. In this case, it could be disadvantageous to low-income drivers.
If you live in any of the states mentioned above, you do not need to worry about your credit score impacting your insurance rates. However, drivers in every other state will want to keep an eye on their credit scores if they want to get the lowest premiums.
Other Factors Will Always Impact Your Car Insurance Rate
Keep in mind that your credit score is just one potential factor in determining your insurance rate. Providers will also consider the following:
- Where you live
- The type of car that you own
- The kind of coverage that you want
- Your age
- Your marital status
- Your gender
- Your driving history
Providers will check the number of times you violated driving rules. If you have a bad car accidents history, your car insurance rates will be high.
How Car Insurance Companies Calculate Credit Scores
Lending institutions such as banks will use credit reports when calculating credit scores. The reports contain your personal information such as gender, job, and income. Auto insurance companies do not use these reports to determine a person’s rate. They only focus on payment history and total debt to determine a credit score.
When you apply for a policy quote, the insurer will typically ask for your Social Security number. They use this number to pull up your credit score. While some insurance companies do not ask for an SSN when you first apply, they will require one before delivering a final price.
Insurance providers use a “soft” credit pull to get your credit information. Unlike a “hard” pull, this process only involves verifying some basic information and will not impact your credit score.
Why Auto Insurance Companies Use Credit Scores When Determining Car Insurance Rates
To insurers, a person’s credit score is an effective predictor of financial risks associated with driving. Studies show that people with poor credit histories tend to get in more accidents and file more insurance claims. Insurers see this as a bigger expense on their end. By looking at credit scores, insurance companies can match more expensive rates with drivers who are more likely to use their insurance.
In theory, a car owner’s history with paying loans on time should have no bearing on their abilities as a driver. However, insurers do not see it the same way. They point to Federal Trade Commission studies that show a relationship between low credit and accident risk, even if the evidence explaining the correlation is unclear. Some researchers argue that those more likely to take financial risks will also take more risks on the road. Yet, no studies have confirmed this belief.
Many consumer and civil rights groups criticize insurers using credit scores as being discriminatory against low-income drivers. On average, people with higher income have better credit scores. Higher earners can also afford cars with more safety features and live in areas with better roads.
How to Improve Your Credit Score
Whether it’s fair or not, you’ll likely need a good credit score if you want to qualify for the best possible car insurance rates. All of the top insurers, including State Farm, Progressive, Geico, USAA, Allstate, and Liberty Mutual, use credit scores to help determine their rates. Here are the main steps to getting out of a credit funk:
Pay Your Bills on Time: Payment history is a factor that determines credit scores. Every time you’re late on a bill, you’ll get dinged on your credit report. This is true even if you can afford your bills but just accidentally forgot to send a payment. If possible, you should ensure that you do not miss a bill payment by 29 days or more.
Pay Down Your Credit Card Debt: Your credit utilization rate usually affects your credit score. When this rate is low, you will likely have a high credit score. This rate is generally calculated by dividing the amount of money that you owe by your credit limit. To keep it low, you should pay down your credit card debt.
Keep Your Old Credit Accounts Open: A factor considered when calculating the credit score is average credit age. This is determined by the number of years that you have had your credit accounts. High average credit age may lower your credit utilization rate. In this case, it improves your credit score. Keeping old credit accounts open can help increase your average credit age.
Consolidate Your Debts: Consolidating your debts can help improve your credit score. To do this, you may need to take a debt consolidation loan from a financial institution. You should use this loan to pay all your debts. To get the most out of a consolidation loan, look for a low-interest option. This tactic can also help you if you have several credit card balances. You should use a balance transfer credit card to pay these balances.
Avoid Hard Inquiries at All Costs: Hard inquiries can temporarily lower your credit score. While car insurers won’t use a hard pull, some mortgage and credit card companies will. You should not apply for any of these loans if you want to improve your credit score.
How Long Will It Take to Improve Your Credit Score?
The time it takes to fix your credit score will depend on how it got damaged in the first place. If your credit score dropped after you missed one or two payments, improving the score will not take long. However, if you’ve missed several payments by 90 days, it will take longer. Your score would drop further if you missed payment on multiple loans. The steps you take to improve your credit score will also determine the length of time to improve it.
Your credit score may impact your car insurance rates, which is why you need to ensure that you have an excellent or good credit score. Also, you may consider auto insurance companies that offer affordable car insurance policies.
