Why does credit affect car insurance?
Even with a flawless driving record, you could get a hike in your insurance rate after the insurance company runs a credit check. Insurers use the information on your credit report to create their own insurance credit score for you, and use it when pricing coverage. Those with poor credit typically pay more for car insurance than those with good or excellent credit. Here we explain why and provide average rate increases by state for drivers with poor credit, as well as tips on how to improve your score and still save on car insurance.
Why and how insurance companies use your credit information
Insurers say their data show a connection between credit history and the filing of claims. People who pay their bills on time on average file fewer and less costly claims than those with a lot of late payments or delinquencies. That means drivers with poor credit generally cost insurance companies more money, so they are charged more for coverage.
Insurance companies don't consider the same credit score that lenders do. They create their own credit score for drivers, using information from your credit history. The credit score used by lenders predicts your ability to repay a loan. A credit-based insurance score predicts whether you'll file claims.
Insurance companies do, however, create their own insurance risk scores based on information from your credit report. The calculations are tweaked a bit but largely reflect your credit situation. Typically, a credit score of 700 or higher means your credit-based insurance score won't be anything to worry about.
Many of the variables used to calculate an insurance score are the same as a standard credit score, such as outstanding debt, length of credit history, new credit applications and type of credit used.
How much does car insurance go up for poor credit?
Drivers with poor credit will pay, on average, 71 percent more (about $1,000 more a year) for a full coverage policy than drivers with good credit, CarInsurance.com's rate analysis shows. Drivers with fair credit pay a rate that is 18 percent higher, on average, than those with good credit.
California, Hawaii and Massachusetts don't allow insurers to use credit information to set rates. Michigan leads the nation among the worst states for drivers with bad credit.
Best car insurance for bad credit
Each insurance company assesses risk differently, so how much more you pay for various things such as an accident claim, traffic violation, or, in this case bad credit, will vary, sometimes significantly. Below you'll see how major insurers compare on average price increases for drivers with poor credit. The increase is based on the difference between a driver with good credit and one with bad credit. You'll see Victoria, which specializes in high-risk insurance, has the lowest percentage increase. But as in this case, carriers with the lowest increases for violations or poor credit may have a higher base rate, compared to others. Geico is actually the cheapest car insurance company for bad credit when looking at how much your pay.
| Company | Good credit rate | Poor credit rate | % increase | $ increase |
|---|---|---|---|---|
| Victoria | $1,591 | $2,193 | 38% | $603 |
| Nationwide | $1,598 | $2,244 | 41% | $646 |
| Allstate | $1,868 | $2,906 | 56% | $1,038 |
| Progressive | $1,483 | $2,644 | 77% | $1,161 |
| Farmers | $1,753 | $3,039 | 78% | $1,279 |
| Geico | $1,109 | $2,094 | 85% | $986 |
| State Farm | $1,400 | $3,012 | 113% | $1,613 |
*Methodology: Calculations are rounded. Rates were fielded by Quadrant Information Services from up to six major insurers in 10 ZIP codes in each state for a driver of a 2017 Honda Accord, age 40, with full coverage and a $500 deductible.
How to improve your credit-based insurance score
Using credit to calculate what drivers pay for insurance is controversial topic, as insurers argue it benefits all drivers by ensuring accurate pricing, while consumer advocates say it's discriminatory and prevents those who need cheap car insurance the most from getting it. Still, there are ways to improve your insurance score, which will also eventually mean lower rates.
- Pay your bills on time
- Keep your credit card balances low-- the insurance score considers the amount you owe in relation to your credit limits, so don't max out your credit cards
- Don't open unnecessary credit accounts
- Establish and maintain credit
- Make sure your credit report is accurate -- you can request free copies of your credit reports from the three national credit reporting agencies through AnnualCreditReport.com
If you're experiencing a financial hardship, find free or low-cost help through the nonprofit National Foundation for Credit Counseling.
As your credit scores improve, your car insurance rates are likely to decline. You should consider pricing a new policy by doing a car insurance comparison at renewal time if you have seen a positive trend in your scores.
A good way to stay current on your consumer credit scores is to monitor them through a site such as Credit Karma. You can review your credit scores and credit reports for free.
The argument that credit-impaired people lead to higher risk of claims is nonsense. It's the bad drivers who lead to higher risk of claims. So, a bad driver with good credit pays less than a good driver with poor credit. Doesn't make sense, does it?
Reply»Poor credit auto loans provide a wonderful opportunity to those with poor credit. You can improve your credit score simply by paying your loans on time. Thanks for sharing.
Reply»To get out from my financial hardships I should be consolidating my loans; however, i don't know what and where to start. But, I would like to personally thank you for sharing something that is helpful for many individuals wanting to consolidate their loans.
Reply»The bigger question in my mind is why should your credit score affect what you pay for insurance of any kind? Do the insurance companies assess a greater risk of filing a false claim for deliberate damage to a lower credit score? Or do they just enjoy making things even harder for those with lower credit scores? I would like to see them justify that practice, if they can.
Reply»Agreed. I have pretty poor credit, and had to shop around before finding an insurer that didn't care very much about credit score for a new car loan (suprisingly, it was far easier to get the loan at a not horrible rate than insurance). In the end, a certain company promoted by a quarterback from Wisconsin cost me nearly $200 a month less than a certain agency with three letters that are the exact same and start with "A" wanted, simply because of the credit factor. I had a clean driving record and no tickets, BTW.
Reply »