How Does Your Credit Score Affect Car Insurance?
In most states, yes, your credit can affect what you pay for car insurance. Insurers use a credit-based insurance score, built from your credit report data, to help predict how likely you are to file a claim. A lower score can mean higher premiums, even with a clean driving record. A few states ban the practice for auto coverage.
Most people know that credit scores affect loan approvals and interest rates. Fewer know they can shape insurance costs too. This guide explains how the connection works, which states restrict it, and what steps may help, including how to handle errors on your credit report.
Key takeaways
- A 2007 FTC study found that credit-based insurance scores were effective predictors of the claims consumers file, and that their use tended to make pricing better reflect risk.
- In most states, a higher credit-based insurance score is associated with lower car insurance premiums. California, Hawaii, Massachusetts and Michigan currently prohibit the practice for auto coverage.
- The same factors that affect a FICO score, such as payment history, outstanding debt and length of credit history, also shape a credit-based insurance score.
- If entries on your report may be inaccurate, Credit Saint can review your reports across all three bureaus and, with your authorization, challenge items that may be inaccurate, unverifiable or outdated.
What Is a Credit-Based Insurance Score?
A credit-based insurance score is a rating insurance companies use to predict the likelihood that a policyholder will file a claim. It comes from credit report data, the same information behind a standard credit score, but it is calculated with a model built for insurance risk, not lending risk.
The two scores are related but not identical. A credit-based insurance score looks at similar factors, including payment history, outstanding balances and length of credit history, but weighs them differently. A FICO score predicts the likelihood of loan default. A credit-based insurance score predicts the likelihood of an insurance claim. For a full breakdown of how standard scores are structured, see our guide on what is a credit score range.
How Does Your Credit Score Affect Car Insurance Rates?
Insurers use the credit-based insurance score as one of several factors to set premiums, alongside driving record, vehicle type, age, location and marital status. In general, a higher score signals lower risk and is associated with lower premiums. A lower score suggests higher risk and tends to mean higher premiums.
The effect can be meaningful. Insurers see consumers with stronger credit profiles as statistically less likely to file claims and price policies that way. Two drivers with similar vehicles and driving histories may pay different amounts if one has a lower credit-based insurance score.
Credit-based insurance scores do not factor in race, religion, gender, age, address or income. The score is based only on credit history data.
What Factors Shape a Credit-Based Insurance Score?
The factors are similar to those that affect a standard credit score:
- Payment history: A record of on-time payments is the most important input. Late or missed payments can hurt both a credit score and a credit-based insurance score.
- Outstanding debt: High balances or maxed-out credit cards can signal financial strain, which insurers may read as higher risk.
- Length of credit history: A longer, well-managed credit history generally produces a better score.
- Credit mix: Having different types of accounts, such as cards and loans, and managing them well can be a positive factor.
- New credit: Too many recent applications can lower a score for a time because of hard inquiries.
Because these factors overlap with FICO scoring, improving a standard credit score generally helps a credit-based insurance score over time. For a closer look at utilization, one of the inputs that can change month to month, see our guide on how credit utilization affects a score.
Which States Restrict Credit-Based Insurance Scores?
| State | Status for Auto Insurance |
|---|---|
| California | Prohibited |
| Hawaii | Prohibited |
| Massachusetts | Prohibited |
| Michigan | Prohibited |
| Maryland, Oregon, Washington | Partial restrictions on how credit may be used |
| All other states | Permitted (subject to state-specific rules) |
Most states allow insurers to use credit-based insurance scores for auto policies. Four currently prohibit the practice for auto coverage: California, Hawaii, Massachusetts and Michigan. If you live in one of these states, your credit won’t affect your auto insurance premium. Other states, including Maryland, Oregon and Washington, limit how credit information may be used.
The rules keep changing, and other states have considered bills to restrict or ban credit-based insurance scores for auto and homeowners coverage. If your state isn’t on the prohibited list, assume your credit may factor into your premium, and check with your state insurance department for current rules.
How Can You Lower Your Rate If Credit Is a Factor?
Start with your credit reports. You can get all three of your credit reports for free and check every account, balance and payment status. If something looks wrong, you have the right under the Fair Credit Reporting Act (FCRA) to dispute it. Our guide on how to dispute items on your credit report walks through the process.
Beyond that, pay every bill on time, keep card balances low and compare quotes from several insurers, since each one weighs credit differently.
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Ashley Davison
EditorAshley is currently the Chief Compliance Officer for Credit Saint, previously the Chief Operating Officer. Ashley got into the Financial world by working as a Logistics Coordinator at Ernst & Young. Coming from a previous career in education, she is eager to teach the world everything she knows and learn everything that she doesn’t! Ashley is a FICO® certified professional, a Board Certified Credit Consultant, a Certified Credit Score Consultant with the Credit Consultants Association of America, UDAAP certified, and holds a Fair Credit Reporting Act (FCRA) Compliance Certificate.