Does Your Credit Score Affect Your Car Insurance Rate?

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Does your Credit Score Affect Your Car Insurance Rate

Does a Credit Score Affect your Car Insurance Rate?

If you drive, you have car insurance. We all know that a perfect driving record reduces the amount you pay for your insurance. But other factors come into play as well that can adversely affect what you pay. If you have less than perfect credit, you may have wondered about this. Well, the answer is, yes it does!

Many auto insurance companies use a credit-based score to help them decide whether to take you on as a policyholder. If they decide to accept you as a customer, your credit score will have a lot to do with what your premium will be. While it is only one of many factors that go into determining your rate, having good credit can definitely save you money on auto insurance. Credit-based insurance scores are not the same thing as the credit scores you are probably familiar with. We're talking about the FICO score used by creditors to calculate your overall credit score. For one thing, traditional credit scores are used to predict if a consumer is likely to be late on a payment over a two-year period, whereas credit-based insurance scores try to predict the likelihood that a consumer will file a claim that will cost the company more money that it collects in premiums from the customer.

In simple terms, they check your credit score to see how reliable you are as a paying customer.

These companies cherry-pick about 30 of almost 130 elements in a credit report and then creates a proprietary score that's different from your FICO score. The increase to your premium can be significant. Single drivers who have merely good credit scores may pay $70 to $500 more per year depending on the state they live in. But in an age of Covid-19, this is particularly unfair as many millions of people have lost their jobs and businesses through no fault of their own. Their credit scores drop and they're penalized by having higher car insurance rates.

In fact, your credit score could have more of an impact on your premium price than any other factor. For instance, single drivers in Kansas with one moving violation can have a premium increase of $122 per year, on average. But a credit score that is considered "good but not great" can boost your premium by $233, even if you have a flawless driving record.

Auto insurance companies definitely consider your credit history before offering you coverage and they are under no obligation to tell you what credit-based insurance score they have cooked up for you. This all began in the 1990s when car insurance companies began testing the theory that credit scores might help to predict claim losses. By 2006, almost every insurer was using credit scores to set prices. Even today, these companies do not advertise this fact. But they are also prohibited from making a decision based solely on your credit history. Here are some things that may help:

You should know that if you live in California, Hawaii, Massachusetts or Michigan, your credit score will not affect your insurance rates no matter what your score is. Those states have laws that limit or entirely prohibit insurance companies from using credit information in determining auto insurance rates. But what about the rest of us?

You should know that whether or not an auto insurance company uses credit-based scores, many factors are considered when determining your eligibility and what your premium rate will likely be. Insurance companies will check your driving record, take into account what kind of vehicle you are insuring and ask how many miles you drive per year. They will consider where you live as well as your age, gender, and whether or not you are married or single.

Let's say you are a 40-year-old married woman who owns a home in an upscale neighborhood. You drive less than 10,000 miles a year and only to the gym and grocery store. You've never been involved in an accident or had a speeding ticket. Oh, and your car has a theft-deterrent system and is housed in a secure garage. You'll definitely get a lower premium rate than a 20-year-old man who drives a souped-up Camaro, has three speeding tickets and parks his hot rod on a city street every night in a crime-ridden district.

You may also have seen television commercials that explain a device car insurance companies use under the guise of rewarding you for safe driving. This involves placing a computer chip in your car to monitor how much you drive, how fast you are driving and how aggressively you are braking. They are more likely looking for ways to penalize you for speeding or reckless driving so they can raise your rates. There are actually companies that offer "pay-per-mile" policies where the more you drive, the more you pay.

In the Covid world we live in, you may be working from home right now. If that's the case, let your car insurance company know that your car sits parked most of the time. Factors like these can definitely get you a lower premium. Call your insurer and let them know you may be eligible for new discounts.