How does your credit impact how much you pay for car insurance?

By: Jilly Pretzel

As any financially savvy person knows, your credit score is a big deal. It can affect your interest rates on your mortgage, your chances of getting a loan, and even your limit on your credit card. But you might be surprised to know that your credit can also affect your car insurance.

share article

While lenders value your score because it lets them know if you’re a financially trustworthy person, your car insurance company looks at your credit score (along with other factors of your background) to predict the odds that you’ll file a claim.

Studies have shown that drivers with poor credit can pay up to 91 percent more in insurance than drivers with great credit. Here are four important things to know about your credit score and car insurance.

1. It’s not actually a credit score that they’re using… it’s an insurance score

“Hold on,” you’re probably saying, “I thought the whole point of this article is that they do look at your credit score?”

We’ll, yes, but it’s not that simple. Every piece of info on your credit score isn’t necessarily valuable to your car insurance team. So, they take certain aspects of your credit report, along with past insurance reports, and calculate them into a new credit-based insurance score.

2. What goes into the insurance score?

The things you should expect to be included in this score are your existing debt or payment history, late payments, credit utilization, and more. So be careful, because if you use too much credit or have made a bunch of late payments, you might be at risk for those higher rates.

Once all of this info is collected, your data is weighed against other policyholder’s credit and insurance claims, and voilà, your insurance score is created.

Not only is this process complicated, it’s also mysterious. After all of this data is collected, you’re left in the dark about your own insurance score. You might be able to make a good guess at your score by looking at your credit score, but that’s about as far as it will go.

3. Things your insurer ignores:

While making insurance scores may be a puzzling process to policyholders, there is some relief. There are some aspects that you won’t have to worry about bringing your score down. Meaning, they’re not going to look into your income or job history when deciding on your insurance score. So if you’re between jobs, or are looking to quit your job to start a business, don’t worry about how your income or position will look on paper.

4. Not everyone has to look out for this

Of course, a great way to improve your insurance score is to work on boosting your credit score. But, before you are thinking of putting off buying a car and hoping for a lower insurance rate when you can boost your score, know that some states actually can’t use credit scores when creating insurance rates. This is actually illegal in California, Hawaii, and Massachusetts.

But, when it comes to those in the remaining 47 states, it’s important to improve or maintain your credit history by making sure you pay your bills on time, not skipping payments, and keeping an eye on your credit report for any errors. You can always check your credit report for free online. Improving your credit score could mean a big difference for your insurance rate, and your wallet.