Understanding the Link Between Credit Scores and Car Insurance Costs
In most states, your credit-based insurance score plays a big role in determining your car insurance premiums. Insurance companies use your credit information to calculate a score that helps set your rates.
Some key factors that go into your credit-based score:
Payment history
Outstanding debts
Credit utilization
So if you have good credit, you will likely pay lower premiums. But poor credit means you could pay nearly double for the same coverage. This outline explores how credit tiers and other rating factors impact what you pay for insurance costs.
How credit score affects car insurance rates
Your specific credit score has a direct correlation to how much you will pay in car insurance premiums. Drivers with excellent credit tend to pay the lowest rates, while those with poor credit pay nearly double the average cost.
Higher credit = lower premiums
There is a clear pattern showing that higher credit scores lead to lower premiums.
Good credit (scores above 660) reduces rates compared to average or poor scores.
Those with excellent credit (above 800) save the most on insurance costs.
The difference averages $1,700 annually between poor and excellent credit.
Credit tiers determine costs
Credit Rating |
Average Annual Premium |
|---|---|
Poor |
$3,479 |
Average |
$2,176 |
Good |
$2,014 |
Excellent |
$1,764 |
These national averages show how much credit tiers impact premiums.
The best rates go to those with excellent credit scores above 800.
Even moving from poor to average credit can save over $600 per year.
States that restrict using credit scores
CA, HI, MA, MI do not allow credit to impact auto insurance rates.
MD, OR, UT also limit the practice.
For most states, credit heavily influences insurance costs.
Where you live affects how credit scores apply.
Example of Credit Score Impact
John and Jane are both 25 years old and live in Ohio. They drive similar vehicles and have no accidents or tickets on their records. But their credit scores differ significantly:
John has a poor credit score of 550.
Jane has an excellent credit score of 810.
When they each get an auto insurance quote from Company A for full coverage, here are their premiums:
John is quoted $289 per month ($3,468 annually).
Jane is quoted $132 per month ($1,584 annually).
Even though all their other rating factors are the same, Jane saves $1,884 per year compared to John solely because of her excellent credit score.
The huge variances in average premiums demonstrate that maintaining good credit should be a priority for lower insurance rates. Shopping around for the best price is also wise, but improving your credit score is the most direct way to save.
Credit score factors in car insurance
Auto insurance companies don't use your exact credit score, but rather generate a credit-based insurance score based on information in your credit report. There are several key aspects of your credit profile that influence this insurance score.
Payment history
Your track record of making payments on time is very influential.
Late payments will lower your score and raise insurance premiums.
On-time payments are positive and can improve your insurance rates.
Consistently paying bills early or on the due date shows responsibility.
Outstanding debts
The total amount of debt you owe affects your credit and insurance scores.
Too much outstanding debt raises questions about your ability to pay bills.
The goal is to keep your debt-to-income ratio under 30% if possible.
Paying down balances helps lower this ratio and improve your credit rating.
Credit utilization
This measures how much of your available credit you actually use each month.
Experts recommend keeping credit utilization below 30%.
Maxing out cards frequently makes your financial situation look risky.
Lower utilization by paying down cards or requesting higher credit limits.
Checking your credit reports from Equifax, Experian and TransUnion will give you the full picture on these key factors.
Monitor your reports regularly for any inaccuracies that could be damaging your score.
Dispute any incorrect personal or account details with the bureaus.
Use free services like Credit Karma to keep tabs on your credit profile.
Improving payment history, debts, and utilization takes time, but pays off in better credit-based insurance scores and lower premiums. It also sets you up for better loan rates and financial health overall.
Average cost by credit rating
Your credit tier has a substantial impact on car insurance premiums nationally. Location also plays a role in determining average costs by credit rating.
National averages by tier
The table below shows the average annual premiums based on credit rating tiers:
Credit Rating |
Average Annual Premium |
|---|---|
Poor |
$3,479 |
Average |
$2,176 |
Good |
$2,014 |
Excellent |
$1,764 |
Drivers with poor credit pay nearly double the average cost compared to those with excellent scores.
Maintaining good credit can save over $400 per year compared to average.
Excellent credit offers the most savings, with average premiums of $1,764 annually.
Even moving up one tier, from poor to average, reduces the average cost by $600 per year.
Differences by gender
Gender is a factor in auto insurance rates in most states.
On average, men pay slightly more than women for the same coverage.
But differences based on credit tiers are still very similar between genders.
Credit Rating |
Men |
Women |
|---|---|---|
Poor |
$3,477 |
$3,481 |
Average |
$2,181 |
$2,170 |
Good |
$2,020 |
$2,008 |
Excellent |
$1,771 |
$1,758 |
For both genders, excellent credit offers big savings compared to poor credit.
So improving your credit score is important for both men and women.
Variation by state
Your location plays a role in exactly how much impact your credit has on premiums.
Some states restrict using credit scores to determine insurance rates.
But in most areas, the tier you fall under substantially influences your insurance costs.
Those with excellent credit save significantly compared to poor, regardless of location.
So while state regulations play a role, individuals with the highest credit tend to pay the lowest auto insurance premiums nationwide. Focusing on improving your credit is one of the best ways to reduce your rates.
Improving credit score
The good news is your credit score is not permanent. Here are some tips for improving your credit rating to potentially save hundreds on car insurance:
Check credit reports
Order free reports from Equifax, Experian and Transunion annually.
Review all details and dispute any errors right away.
Inaccuracies like closed accounts or wrong addresses can drag down your score.
Monitoring regularly prevents mistakes from causing lasting damage.
Make timely payments
Nothing hurts your score more than late payments or non-payment.
Set up autopay for bills whenever possible to avoid missed due dates.
Even one month of missed payments stays on your report for years.
A record of on-time payments demonstrates responsibility to lenders.
Lower credit utilization
Keep balances low compared to your total credit limits.
Call issuers and request higher credit limits to lower your utilization ratio.
Pay down cards with the highest balances first to quickly improve this ratio.
Experts recommend utilization under 30%, with under 10% being optimal.
Avoid new accounts
Each credit card or loan application causes a hard inquiry on your report.
Too many hard inquiries in a short time frame can negatively impact your score.
Stick with your current accounts to avoid this temporary ding.
Pay down existing balances instead of opening new ones.
Use credit boosting services
Opt into programs like Experian Boost that add positive payment history.
Connect bank accounts so on-time utility/phone payments get reported.
This can raise your credit score for bills not normally included.
Every extra on-time payment helps demonstrate financial responsibility.
With some diligence and smart financial habits, you can steadily work to improve your credit standing. A higher score takes time to build, but pays dividends in better loan and insurance rates.
Minimum vs full coverage
The amount and types of auto insurance coverage you choose also impact your overall premiums. Minimum coverage provides less protection, but costs much less than full coverage.
Liability, collision, comprehensive
There are three main types of car insurance:
Liability covers damage you cause to others
Collision covers damage to your vehicle from a crash
Comprehensive covers non-crash damage like theft or vandalism
Minimum coverage only includes liability protection to meet state requirements. Full coverage bundles liability with collision and comprehensive for maximum protection.
Higher premiums for full coverage
Credit Rating |
Minimum Coverage |
Full Coverage |
|---|---|---|
Poor |
$1,334 |
$3,479 |
Average |
$834 |
$2,176 |
Good |
$772 |
$2,014 |
Excellent |
$679 |
$1,764 |
Full coverage costs substantially more per year due to the additional protections.
But it provides peace of mind in case of an at-fault accident or incident.
Your premium increase depends partly on your credit tier.
Lower costs with minimum coverage
Drivers looking to save opt for minimum or liability-only policies.
This meets the state legal requirements but lacks extra protections.
You pay out-of-pocket for any damage to your vehicle.
Best for older cars with low value compared to repair costs.
Before selecting minimum coverage, determine if the risk of high out-of-pocket costs outweighs the premium savings. Maintaining good credit helps reduce premiums for both types of policies.
Discounts to lower insurance costs
In addition to improving your credit score, there are discounts you can take advantage of to reduce your car insurance premiums.
Usage-based insurance
Many companies offer programs to reward safe driving habits.
They use a device in your vehicle to track metrics like speed and braking.
This allows providers to capture your driving data and pinpoint risks.
Good drivers can receive significant discounts, up to 30% off.
Bundle home and auto
Most insurers offer a discount for bundling multiple policies.
Insuring your home or apartment along with your car saves over having separate policies.
The more lines of insurance you can bundle, the greater your discount.
Bundling demonstrates you are a loyal, low-risk customer.
Pay annually instead of monthly
Payment Schedule |
Average Discount |
|---|---|
Monthly |
None |
6 months |
5% |
Annual |
8-12% |
Paying your full 6-month or annual auto premium upfront can lower your costs.
Administrative costs typically drive up monthly payments, rendering them more pricey
Those with the means can substantially boost savings by opting for the annually paid version
Raise deductibles
Agreeing to a higher deductible lowers your monthly premium.
Where filing claims occur, higher out-of-pocket costs follow.
Designed with DIYers in mind. If you feel confortable doing some small repairs, your costs will also be reduced.
It may come with drawbacks in the case of major claims.
To maximize savings, thoroughly explore all available discounts and promotions. Besides a flawless credit score, driving safely could result in more affordable premiums.
Raising your credit score
Improving one's credit score requires persistence, yet this proven method unlocks cost savings on insurance premiums across the long term. Here are tips for improving your score:
Pay all bills on time
Set up autopay for every bill possible to avoid lapses.
Use calendar reminders and alarms before due dates.
Even a single 30-day late mark can hurt your score.
Multiple late payments compound the damage.
Reduce credit utilization
Keep balances low compared to limits, below 30% if possible.
Pay down cards with the highest balances first.
Call issuers to request higher credit limits to help lower your utilization ratio.
Avoid maxing out cards.
Limit hard inquiries
Too many credit checks in a short time can negatively impact your score temporarily.
Each application for a new credit card or loan results in a hard inquiry.
Avoid applying for multiple new accounts within a few months.
Utilize your current accounts first before taking on new credit.
Monitor credit reports
Review reports from the three bureaus for any inaccuracies that could be hurting your score.
Dispute any incorrect personal details or account information.
Stay on top of your credit history so you can address issues quickly.
Add positive history
Sign up for services like Experian Boost that add utility payments to your credit profile.
On-time cell phone and streaming service payments also get added.
The more positive payment data, the better.
Improving credit takes diligence and making payments on time consistently over time. But the savings from better loan and insurance rates make it very worthwhile.
Key takeaways
Here are some of the main points to understand about credit scores and car insurance:
Maintaining excellent credit (scores above 800) leads to the lowest insurance premiums.
Check your credit reports regularly and dispute any errors to keep your score optimized.
Pay all bills on time each month to avoid dings for late payments.
Shop for quotes from multiple insurers to find the best insurance rates. Prices can vary widely for the same coverage.
Improve your credit by paying down balances, lowering utilization, limiting hard inquiries and more.
Boost your score and add positive history with services like Experian Boost.
Live in CA, HI, MA or MI? Your credit doesn't impact insurance costs due to state laws.
Insurance scores differ slightly from standard credit scores but both favor high ratings.
Your total outstanding debts, payment history and utilization determine your credit-based insurance score.
Drivers with poor credit pay nearly double compared to those with excellent credit, on average.
Men and women both see significant savings from excellent credit on auto insurance.
Bundling your home and auto policies can lower insurance costs. Also look for other discounts.
Selecting just minimum liability coverage costs much less than full coverage.
Paying your full 6-month or yearly premium upfront saves compared to monthly payments.
The key takeaway is that maximizing your credit score directly leads to big savings on car insurance over time. A little extra effort goes a long way.
Frequent Answered Questions:
Q: How much does a poor credit score increase your car insurance premium?
A: On average, drivers with poor credit pay 97% more for full coverage car insurance compared to those with excellent credit. This can amount to over $1,700 per year in extra costs.
Q: Can I get car insurance if I have bad credit?
A: Yes, you can still get car insurance with poor credit in most cases. However, you will pay significantly higher premiums compared to drivers with good credit. Some insurers may decline your application if your credit is very poor.
Q: Does my exact credit score factor into my insurance rate?
A: Not directly. Insurance companies use your credit report to generate a credit-based insurance score, which is what determines your premiums. But in general, the higher your credit score, the lower your insurance costs will be.
Q: How long does a poor credit score impact your car insurance rates?
A: It depends on the insurer, but in most cases a low credit score will impact your rates for about 3-5 years until it improves. Maintaining good credit is important to keep premiums low in the long run.
Q: Can I get my insurance company to re-rate my policy if my credit score goes up?
A: You typically have to wait until your policy renewal date to be re-rated based on an improved credit score. In the meantime, shop around to see if another insurer offers better rates.
Q: What are the fastest ways to improve my credit score?
A: Pay all bills on time, pay down balances, dispute any errors, and limit new credit applications. Improving your score takes diligence, but even small gains can reduce your insurance costs.
Conclusion
Your credit score plays a major role in auto insurance premiums in most states. Individuals with excellent credit enjoy the lowest rates, while those with poor scores pay nearly double.
Fortunately, you can take steps to improve your credit through diligent financial habits over time. Monitoring your score, making timely payments, reducing debts and limiting hard inquiries will steadily raise your rating.
A higher credit score offers savings on insurance and better loan terms. So it's worth the effort to boost your rating, even if it happens gradually. Maintaining good credit is one of the smartest financial moves you can make.
Sources:
https://www.forbes.com/advisor/car-insurance/rate-increase-poor-credit/ Forbes
https://www.cnbc.com/select/credit-score-save-on-car-insurance/ CNBC
https://www.thezebra.com/resources/research/credit-insurance-rates/ The Zebra
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