Credit Score Impact: Auto Insurance Rates Explained

Your credit score can have a significant impact on your auto insurance rates. In most states, insurance companies use credit scores as a factor in determining insurance premiums, with those with poor credit often paying significantly more for their coverage. This is because insurers believe that individuals with lower credit scores are more likely to file insurance claims, and so charge higher rates to offset the increased risk. However, it's important to note that this practice is not uniform across the board, and some states prohibit or limit the use of credit scores in setting insurance rates. Ultimately, improving your credit score can be a beneficial step towards securing more favourable insurance premiums.

Credit-based insurance scores

Auto insurance companies often consider an individual's credit history or use a credit-based insurance score before offering coverage. This is because research shows that individuals with a higher credit score are less likely to file a claim against their insurance company. As a result, carriers often reward customers who are less likely to file claims with preferential rates.

There are several factors that are used to calculate a credit-based insurance score, including:

• Outstanding debt
• Credit history length
• Credit mix
• Payment history
• Pursuit of new credit

It is important to note that credit-based insurance scores are not used to measure how creditworthy an individual is. Instead, they are used to measure how risky an individual is from an auto insurance claim perspective, based on their creditworthiness.

Payment history

Late payments can negatively impact your credit score and creditworthiness. Generally, late payments that are at least 30 days past due can be reported to credit bureaus and affect your credit score. The longer you go without paying, the more significant the negative impact on your score.

To improve your payment history, it is important to pay your bills on time and maintain your accounts in good standing. Setting up automatic payments can help ensure timely payments. Additionally, keeping your accounts current and making at least the minimum payments can contribute to a positive payment history.

When it comes to auto insurance rates, payment history is one of the factors considered by insurance companies. In most states, insurance companies use credit-based insurance scores, which include payment history, to determine insurance rates. Individuals with a good credit history are often considered less likely to file claims, resulting in lower insurance rates. Conversely, drivers with poor credit history may be viewed as higher-risk and charged higher insurance premiums.

Length of credit history

The length of an individual's credit history is a significant factor in determining their auto insurance rates. This is because insurance companies believe that individuals with a longer credit history are more likely to have a stable financial background, which can lead to lower insurance premiums.

The length of credit history is a factor in calculating an individual's credit score, which in turn affects their auto insurance rates. A longer credit history can contribute to a higher credit score, which can result in lower insurance premiums. Insurance companies often view individuals with longer credit histories as lower-risk, as they have a track record of managing their finances effectively. This can lead to preferential rates and lower overall costs for auto insurance.

Maintaining old lines of credit can be advantageous for individuals seeking to optimize their auto insurance rates. By keeping long-standing credit accounts open, individuals can demonstrate a lengthy credit history, which can positively impact their credit score and, consequently, their insurance rates. It is recommended to utilize old credit cards sparingly and ensure timely payments to maintain a positive credit history.

The impact of credit history length on insurance rates can vary across states. While most states allow insurance companies to consider credit history, some states, such as California, Hawaii, Massachusetts, and Michigan, have regulations prohibiting or limiting the use of credit scores in determining insurance rates. In these states, insurance companies base rates on factors such as driving records, location, and other characteristics.

It is worth noting that the absence of a credit history can also lead to higher insurance rates. Insurance companies often view individuals without a credit history similarly to those with poor credit, resulting in higher premiums. However, some states, including New Jersey and Rhode Island, prohibit insurance companies from charging higher rates due to a lack of credit history.

Types of credit

Credit scores are calculated based on a few different factors, all related to your borrowing history and current debt situation. These factors are used by insurance companies to determine your insurance score, which is different from a regular credit score. While the exact formula for an insurance score varies from company to company, the following types of credit are typically considered:

Outstanding Debt

The amount of debt you currently have factors into your insurance score. This could include credit card debt, loans, mortgages, and more.

Credit History Length

The length of your credit history also matters. A longer credit history can contribute positively to your insurance score.

Credit Mix

The variety of credit types you have is also considered. This includes credit cards, auto loans, mortgage loans, and other types of loans or credit accounts.

Payment History

Your payment history is a significant factor in your insurance score. Consistent, on-time payments are viewed favourably, while late payments or credit delinquencies can negatively impact your score.

Pursuit of New Credit

Recent attempts to open new lines of credit can also be a factor. Applying for multiple new credit accounts in a short period can negatively impact your score.

It's important to note that improving your credit score in these areas can positively impact your insurance score and potentially lead to lower insurance premiums. Additionally, maintaining good financial habits, such as paying bills on time and managing your credit utilization ratio, can also contribute to a favourable insurance score.

Credit scores by state

Credit scores play a significant role in determining auto insurance rates, with higher scores often leading to lower premiums. While each state has its own average credit score, the impact of credit scores on insurance rates varies across different states. Here's a closer look at credit scores by state and how they relate to auto insurance:

Credit Scores Across the States

According to Experian's 2020 Consumer Credit Review, the average FICO Score in the US reached a record high of 710 in 2020. Minnesota residents topped the list for the ninth consecutive year, with an average credit score of 739. Mississippi, on the other hand, had the lowest average score of 675, though it still showed an improvement from the previous year. All states experienced an increase in credit scores, ranging from three to ten points.

In 2021, the national average FICO Score rose to 714, an increase of four points from the previous year. Minnesota once again led the way with the highest average score, followed by Vermont, Wisconsin, New Hampshire, Washington, and North Dakota. Mississippi, Louisiana, Alabama, Oklahoma, Texas, and Georgia were the states with the lowest average scores.

Impact on Auto Insurance Rates

In most states, credit scores can significantly influence auto insurance rates. Insurance companies use credit-based insurance scores to assess the likelihood of a customer filing insurance claims. These scores are based on factors such as payment history, length of credit history, credit mix, and outstanding debt.

However, it's important to note that not all states allow credit scores to be a determining factor in auto insurance rates. California, Hawaii, Massachusetts, and Michigan have regulations prohibiting or limiting the use of credit scores in setting insurance premiums. In these states, insurance rates are primarily based on driving records, location, and other factors.

The impact of credit scores on insurance rates varies widely across states due to factors such as local traffic conditions, weather patterns, population density, and the cost of living. For example, in Washington, D.C., poor credit can lead to rates that are two and a half times higher than average. In contrast, states like New York, New Jersey, Texas, and Florida see more than double the rates for drivers with poor credit.

Improving Credit Scores

Enhancing credit scores can be beneficial for individuals, as it may lead to better auto insurance rates and other financial advantages. Paying bills on time, maintaining old lines of credit, and keeping credit inquiries to a minimum are some effective strategies for improving credit scores. Monitoring credit scores regularly and taking proactive measures can also help individuals stay on top of their financial health.

Frequently asked questions