Bad Credit Auto Insurance: Possible?

Having bad credit can make it difficult to find affordable car insurance, as insurance companies view individuals with poor credit scores as more likely to file insurance claims. This means that drivers with bad credit often pay more for their insurance than those with good credit scores, with the difference in rates being as high as 71% nationwide. However, the impact of a person's credit score on their insurance costs can vary depending on the insurance company, as each insurer has its own proprietary underwriting process.

In most states, it is legal for car insurance companies to use an individual's credit history as a rating factor when determining insurance rates. However, there are a few states, such as California, Hawaii, and Massachusetts, that ban the use of credit scores in setting car insurance rates.

If you have bad credit, it is important to shop around and compare quotes from different insurance companies to find the best deal. Some companies that offer cheap car insurance for drivers with bad credit include GEICO, Nationwide, and Progressive. Additionally, there are a few companies that offer no-credit-check auto insurance, which means they do not use an individual's credit history to generate their auto insurance rate.

How to save on car insurance with bad credit

Having bad credit can make it challenging to find affordable car insurance. Insurance companies consider your credit history when calculating your premium, and a poor credit history can lead to higher insurance costs. However, there are several ways to save on car insurance even with bad credit. Here are some tips to help you reduce your car insurance expenses:

• Shop around for quotes: Compare rates from multiple insurance companies, as prices can vary significantly between insurers. The cheapest insurers for drivers with poor credit may include GEICO, Nationwide, and USAA.
• Look for discounts: Take advantage of various discounts offered by insurance companies, such as good driver discounts, multi-policy discounts, accident-free discounts, paperless billing discounts, and vehicle safety equipment discounts.
• Raise your deductible: Opting for a higher deductible on your comprehensive and collision coverage can lower your monthly insurance payments. Just ensure that you can afford the higher deductible in case of an accident.
• Reduce your coverage: Evaluate your needs and consider reducing your coverage if your circumstances have changed. For example, if your vehicle is older and has a low value, you may not need comprehensive and collision coverage.
• Pay your full annual premium upfront: Many insurance companies offer discounted rates if you pay the full premium for the year in advance rather than in monthly or quarterly instalments.
• Improve your credit score: While this is not a quick fix, taking steps to improve your credit score over time can help reduce your insurance premiums. This includes paying your bills on time, keeping your credit card balances low, and disputing any errors on your credit report.
• Consider usage-based insurance: Telematics programs that track your driving habits and reward safe driving can help lower your insurance rates.
• Explore pay-per-mile insurance: If you don't drive often, you may benefit from insurance programs that base pricing on your total mileage.
• Choose the right company and coverage for your car: The right insurance company and coverage for your vehicle can depend on various factors, including your age, driving record, location, and the value of your car. Compare rates and coverage options from different insurers to find the best fit for your needs.

Car insurance companies that don't check credit scores

While most car insurance companies do check credit scores, there are a few that don't. These are often smaller, local insurers or companies that offer specialised insurance products. Here are some car insurance companies that don't check credit scores:

• Usage-based insurance companies: These companies base your premiums on how many miles you drive and your driving behaviour, rather than a fixed annual rate. Some usage-based insurance companies, like Root and MetroMile, will not check your credit score.
• Telematics insurance companies: These companies use a telematics device or mobile app to track your driving habits and set your premium based on how safe you are as a driver. Progressive Snapshot, State Farm Drive Safe and Save, and Nationwide SmartRide are some examples of telematics insurance programs.
• CURE: CURE (Citizens United Reciprocal Exchange) is a non-profit insurance carrier that bases rates on customers' driving records. They currently offer auto insurance in Michigan, New Jersey, and Pennsylvania.
• Dillo Insurance: Dillo provides auto insurance policies in Texas to customers with tickets, accidents, lapses in coverage, or no prior coverage without checking credit.
• Empower Insurance: Empower offers car insurance options that don't use credit when calculating premiums. They are also only available in Texas.

In addition to these companies, it's worth noting that there are currently four states in the US that ban insurance companies from using credit scores to determine insurance rates: California, Hawaii, Massachusetts, and Michigan. Some other states, like Maryland, Utah, and Oregon, have restrictions on how insurance companies can use credit scores but don't outright ban their use.

How to improve your credit score

Improving your credit score can be a challenging task, but with a good strategy and some patience, it is possible. Here are some tips to help you boost your credit score:

• Make on-time payments: Payment history is the most important factor in determining your credit score. Always pay your bills on time to establish a positive payment history. Set up autopay or calendar reminders to ensure timely payments.
• Pay down revolving account balances: Aim to keep your credit utilisation rate low. Pay off high credit card balances and consider consolidating debt or using a balance transfer credit card.
• Don't close your oldest account: The length of your credit history matters, so avoid closing your oldest credit accounts. Keep them active by using them occasionally or setting up a small recurring bill payment.
• Diversify your credit: Lenders like to see a mix of credit types, such as credit cards, auto loans, and mortgages. Applying for different types of credit over time can improve your score.
• Limit new credit applications: Each new credit application results in a hard inquiry on your credit report, which can lower your score. Only apply for new credit when necessary, and consider prequalification when available.
• Dispute inaccurate information: Review your credit reports from Experian, TransUnion, and Equifax for any inaccuracies or errors. Dispute any incorrect information to have it removed from your report.
• Become an authorised user: If you're new to credit, consider asking a parent or loved one to add you as an authorised user on their credit card. Ensure the account has a positive payment history and a low credit utilisation rate.
• Improve your credit utilisation: Keep your credit card balances low relative to your credit limits. Aim for a credit utilisation rate below 30%, with lower rates being better for your score.
• Get credit for rent and utility payments: Services like Experian Boost can help you get credit for on-time rent and utility payments, which can improve your score.
• Build a long credit history: Lenders prefer to see a lengthy credit history. Avoid closing old accounts and focus on maintaining a positive payment history over time.

States where credit scores don't affect car insurance rates

While most states allow insurance companies to use credit-based insurance scores to help them make decisions about whom to insure and how much to charge, some states have banned the use of credit scores in setting car insurance rates. Here is a list of states where credit scores do not affect car insurance rates:

• California
• Hawaii
• Massachusetts
• Michigan

In addition, Maryland, Nevada, Oregon, and Utah have placed some restrictions on how insurance companies can use credit scores when setting car insurance rates. For example, in Maryland, insurance companies can use credit history to help determine rates on a new policy but cannot use it to deny the initial application, cancel a policy, refuse to renew a policy, or increase premiums during a renewal. In Nevada, there is a temporary limitation on the use of credit scores by insurance companies, which is in effect until May 20, 2024.

Why car insurance companies use credit scores

Car insurance companies use credit scores to calculate risk and predict the likelihood of future insurance claims. The credit score used by insurance companies is different from the one used by financial institutions when you apply for a loan or credit card. Insurance companies use a credit-based insurance score that is calculated differently and is not available to the public.

Actuarial data and studies have shown a correlation between credit history and the number of insurance claims filed. People who pay their bills on time tend to file fewer and less costly claims than those with a history of late payments or delinquencies. As a result, insurance companies consider individuals with poor credit scores to be higher-risk drivers and charge them higher insurance premiums.

The impact of credit scores on insurance rates varies across states and companies. In some states, such as California, Hawaii, Massachusetts, Michigan, and Washington, the use of credit scores in setting insurance rates is banned. However, in most states, credit history is a factor in determining insurance premiums, and drivers with poor credit may pay significantly more for their insurance.

While improving your credit score may take time, there are ways to mitigate the impact of a poor credit score on your car insurance. Shopping around and comparing quotes from different insurance companies can help you find more affordable coverage. Additionally, taking advantage of discounts, raising your deductible, and reducing your coverage can also help lower your insurance costs.

Frequently asked questions