Credit Scores and Car Insurance Rates

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Most drivers are well aware that certain factors influence their car insurance rates. Most people know that their driving history, age, and the car they drive will affect their premiums. What they don’t know is that their credit score will as well.

In recent years, car insurance companies have been placing an increasing amount of importance on drivers’ credit. In the past, credit did matter to car insurance providers, but not nearly as much as it does today. Currently, every car insurance provider will check a potential customer’s credit history before offering or denying them coverage.

Why Does a Driver’s Credit Score Even Matter?

Many people argue that a driver’s credit rating should have no bearing on their ability to get the lowest possible rates. A driver could have an immaculate driving history, but if their credit score is low, they will not be eligible for the lowest insurance premiums. Many people feel that this is unfair.

Car insurance providers assume that a good credit rating means that a driver is more responsible. Having good credit generally means that a person responsibly manages their finances and pays their bills on time. Insurance providers assume that this responsibility carries over to their behavior on the road.

A statement released by Donald Hansen, representing the National Association of Independent Insurance Adjusters, reiterated the fact that insurance companies put a lot of importance on a driver’s credit. According to Hansen, research has shown that drivers with good credit also manage other tasks more effectively, including driving.

How Car Insurance Companies Calculate Rates

Car insurance companies have a unique way of determining insurance rates. While they do figure in a driver’s credit score, they do so using a unique formula, which of course, is kept secret from the public. This formula helps companies assign drivers with an “insurance score”, which is similar to their FICO score, but not entirely the same. This is the number that insurance companies use to determine rates.

The problem is that a driver’s insurance score has a huge bearing on their ability to get low rates. For instance, if a driver with bad credit chooses to be insured by Allstate, they can expect to pay three times as much as a driver with good credit. While this may seem extreme, this is how much a driver’s credit score counts.

For a better understanding of what is used to determine a driver’s insurance score, consumers must understand what affects their credit rating. Insurance companies are looking at factors like:

  • Payment History – Does a consumer pay their bills on time?
  • Public Records – Accounts in collections, bankruptcy, foreclosures, liens, judgements
  • Credit Inquiries – How often does a consumer apply for new credit?
  • Open Accounts – How many credit cards does a consumer have? What about loans?
  • Types of Credit – Whether a person’s debt is due to a mortgage loan, credit cards, etc.
  • Available Credit – Has a consumer maxed out their available credit?
  • Age of Open Accounts – How long has a person kept their accounts in good standing?

These are what factors the credit bureaus take into consideration when assigning credit scores. This is also what auto insurance companies will look at when determining rates.

How High Does a Driver’s Score Need to be to Get the Best Rates?

A credit score of 720 or higher is considered ideal. As long as consumers have at least a 720, they will usually qualify for the lowest auto insurance rates. For many people, this is a good thing, considering that the median score, according to Fair Isaac, is a 723.

However, saying that the median score is a 723 is a little deceiving. Median means in the middle. This does not mean that the average person has a score of 723. According to TransUnion, 18% of people have a score between 700 and 749. The problem is that 42% of people are lower than this. Therefore, at least 42% of people will not qualify for the lowest auto insurance rates.

Additionally, anything below a 620 is considered a very poor credit score. Also according to figures released by TransUnion, 15% of people have a score below 600. 12% have a score between 600 and 650. Unfortunately, this means that there is a lot of people that are going to be charged sky high prices for auto insurance.

What Driver’s Can Do to Lower their Insurance Rates

Auto insurance companies are not required to tell consumers when their credit score has kept them from receiving a lower rate. This means that drivers will need to determine if their credit is affecting their premiums on their own. To do this, the first thing that a driver will want to do is obtain their credit report. According to the Fair Credit Reporting Act, consumers are entitled to a free credit report from each of the three bureaus every year.

To secure the cheapest car insurance quotes, drivers can also do these three things:

  1. Correct inaccuracies in their credit report – Once consumers obtain their reports, they need to check for inaccuracies. A low credit score could be due to inaccurate reporting. If this is the case, the consumer will need to contact the credit bureaus to have this information changed.
  2. Shop around for car insurance – Every auto insurance company calculates insurance scores differently. Check with several different companies before choosing a policy.
  3. Take steps to improve their credit score – Pay bills on time and try to pay down credit cards. Simply making an effort to increase a consumer’s credit score can make a big difference in their insurance rates.

The Importance of Having a Good Credit Score

    The fact is, a person’s credit score will affect many different areas of their life. The best way for drivers to get a low price on car insurance is to carefully mange their driving history, as well as their credit score.


    Author Bio: Laura is a financial writer who specializes in auto insurance articles. She contributes for a car insurance rates website. When she is not busy driving her kids around from place to place she is fond of settling down for some quiet time with a mug of hot chocolate and a good book.

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