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Does Your Credit Score Affect Your Car Insurance Rate?

Does Your Credit Score Affect Your Car Insurance Rate

You’ve probably been told about the importance of your credit score, or FICO Score already.

When it comes to buying a car and renting or buying a place, your credit score will be one of the determining factors of whether or not you are able to. Your credit score acts as an indicator of how likely you are to pay your bills on time.

Renting and buying a car on a payment plan are prime examples of where a good credit score or FICO score will come in handy. But it also doesn’t have to be with just large purchases. Your credit score will also tie into other payments like a mortgage for a home or a lease on a car. Of course, another regular payment that nearly everyone in the United States makes is car insurance.

And would you know it, credit score directly plays into and affects your auto insurance coverage annual premiums. But how do car insurance companies look at and perceive your credit score?

This post serves as your tell-all guide to the relationship between credit score and your auto insurance rates.

What Exactly is a Credit Score And How Does it Impact You?

We’ll start out with the basics of what a credit score or FICO score is and how it impacts you.

A credit score or FICO score is assigned to you by your credit card provider. The creditors will score you based on how you pay your monthly bills. Specifically, the score is an indicator or prediction of how likely you are to miss a payment or fall behind on them. Essentially, it’s an indicator of your financial reliability.

Scores are typically listed as anywhere between 100 to 900. Anything lower than 580 isn’t considered good, while anything up to 669 is fair. Good credit scores are from 670-739 and anything greater than 744 is considered to be an excellent credit score.

Your credit score or FICO score will be considered whenever you are making a purchase that requires significant payments like applying for a new card, buying a car, or renting an apartment. The company wants to make sure you will be able to make your payments on time. In turn, when you make all your payments on time, this will be reflected in your credit history and score.

There are several major car insurance companies that will do credit checks and take your credit score into account if you wish to purchase an insurance policy with them, be it auto or home.

How Does Your Credit Score Affect Car Insurance?

With the general knowledge of credit scores, let’s talk about how it ties into and ultimately affects your car insurance when it comes to applying for auto insurance policy coverage.

49 out of 50 states require that you carry car insurance. So unless you live in New Hampshire, you will most likely experience exactly what we’re about to cover about credit score-based auto insurance premiums.

There are some states where they outright made using such things as a credit score or FICO score for auto insurance illegal. These include California, Michigan, Massachusetts, and Hawaii.

In states where it’s practiced, the car insurance company will look at your credit score or FICO score and use those to create an insurance-based credit score. This insurance-based credit score functions exactly like the original, but instead of predicting how likely you are to miss payments, it predicts how likely you are to file insurance claims with a high coverage value that you usually can not afford.

What is a Credit-Based Insurance Score?

By looking at your credit score or FICO score, which includes an accurate record of debt and payment history, as known as credit history and credit report, auto insurance companies are able to assign you a credit-based insurance score which will play a role in dictating what your car insurance premiums will be set.

With a feel for your finances, the auto insurance company will be able to score how likely you are to file a claim that would exceed your auto insurance coverage limits. You will usually set your auto insurance coverage limits when you buy your auto insurance in accordance with your state’s minimum car insurance coverage requirements. It should be noted that these car insurance coverage requirements are nowhere near enough to adequately cover you in the event of a claim.

To be fully covered involves much higher auto insurance coverage limits. However, based on your credit score or FICO score, the car insurance company may estimate that such limits are not in your budget, but you do exceed the minimum.

While you’re paying lower auto insurance premiums because you have less coverage, you’ll have to pay a portion out of pocket if you are in an accident. Your credit-based insurance score predicts the likelihood of this happening. The good news is that this credit-based insurance score isn’t determined by other personal factors like car type, sex, or occupation -just your credit score.

How Much do People With Certain Scores Pay For Insurance?

Let’s look at exactly how certain credit scores affect car insurance premiums in the eyes of auto insurance providers.

Uninsured drivers will pay the following amounts for getting car insurance premiums based on their credit score:

  • Bad credit score (100 to 580) - Drivers with a poor credit score or FICO score and poor credit history can expect to pay around $2,424 annually for full coverage and $1,008 annually for basic auto coverage costs.
  • Average credit score (670-739) - Drivers with an average score will pay about $2,076 annually for full coverage and $700 for basic coverage.
  • Good credit score (740 and greater) - Drivers with good to excellent credit scores will be paying around $1,555 for full coverage and $545 for basic coverage yearly.

What do Car Insurance Companies Look at With New policyholders or uninsured drivers?

Let’s look at what else determines your auto insurance rates with major car insurance companies so you can get a feel of how each factor will play into your auto insurance premiums and why they are important.

In addition to credit scores, there are several other personal factors that potential car insurers will look at before you purchase a car insurance policy with them.

Your car insurers will consider your:

  • Driving record - It’s common knowledge in the car insurance industry that the safest drivers will receive the lowest auto insurance premiums because they are less likely to file claims often. Auto insurance companies look at driving history to see how good your driving habits are. A clean driving record leads to cheaper rates.
  • Place of residence - By looking up your zip code, car insurance companies are able to consider such things as crime statistics and population. Those in large urban areas more prone to crime will see higher car insurance premiums on average than those living in rural communities.
  • Type of car - Different makes and models of cars have their own car insurance rates. A sports car will cost more to insure than a sedan would, for example. Older cars cost of insurance may be less, but if they are over ten years old, they will need a special kind of auto insurance policy.
  • Age - Younger and newer drivers have to pay higher average auto insurance rates than older, more experienced drivers. With no prior driving record, history, or experience, car insurance companies have no choice but to assume that these drivers will be high-risk level drivers when it comes to calculating their car insurance premiums.
  • Sex - More common knowledge in the car insurance world is that women pay lower car insurance premiums than men.
  • Marital status - Because married couples are more financially stable, they pay lower car insurance premiums for their cars. Often, they are listed on the same auto insurance policy.
  • How much car insurance coverage is desired - The amount of auto insurance coverage and the types of insurance policies you wish to buy directly affect your car insurance costs. For car insurance, there is basic coverage and full coverage. Basic car insurance coverage refers to just carrying liability insurance, while full auto insurance coverage entails comprehensive and collision insurance. The more car insurance coverage you want, the more your auto insurance premium costs.

How to Keep a Good Credit Score For Low Car Insurance Rates

While your credit-based score and your insurance-based score are two different things, they have a direct effect on each other -if one is high then so will the other. The good news is that the ability to change your credit score or FICO score is entirely in your hands.

Do the following to improve your credit score or FICO score:

  • Make your payments on time - Pay off your account and credit card balances within the month you accumulate them. Staying on top of your bills is the best way to show financial reliance and stability, which will increase your credit score. Late payments will have the opposite effect.
  • Make your account current - This should be done if you’ve fallen behind on your credit card bills. You must make a payment that satisfies the past balance from the previous month or make a minimum payment for the current month. These payments wouldn’t be due by a certain date; rather, your credit card providers tell you that you must make your account current.
  • Handle debt with down payments - If you find yourself in credit debt, the best way to handle it is to gradually chip away at it with regular payments. Debt can follow you for years, so you want to avoid it.
  • Monitor your credit report - You don’t have to have eyes on your credit report all the time, but you should check up on it at least once a year.

What Are Other Ways to Keep Car Insurance Rates Low?

In addition to your credit score or FICO score, there are always some tips and tricks to get the best auto insurance premium rates.

Every car insurance company offers its own sets of discounts, so it would be helpful to search around, see which ones you qualify for, and compare. These discounts can be for safe driving, being a student driver, and even brand affiliations or companies like employers. Other notable discounts they offer are based on your car’s safety features.

An example would be anti-theft devices. Having them installed on your car can qualify you for a discount on your car insurance premiums.

Another way to save on car insurance premiums is how you choose your auto insurance coverage. Lower car insurance coverage limits within the legal limits are a great idea for drivers with older cars that they don’t need to insure fully.

Another way to save is to skip on full car insurance coverage if it is unnecessary. Maybe you won’t need comprehensive auto insurance coverage in the area you live in.

In conclusion, it all comes down to having safe driving habits and paying your credit card bills on time.

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