How does your credit score affect your car insurance rate?

You may know that poor credit can affect your ability to finance the purchase of a car. You may not realize that your credit can also influence how much you pay to insure your vehicle.

Insurers use a credit-based insurance score (CBIS) to determine whether someone qualifies for a policy and to set rates. Although not the same as the Fair Isaac Corporation (FICO) and VantageScore credit scores used by lenders for mortgages and car loans, credit-based insurance scores rely on much of the same information, such as payment history and outstanding debt.

A handful of states – California, Hawaii, Massachusetts, and Michigan – prohibit insurance companies from using a person’s credit to determine rates. Others, including Nevada, Oregon and Utah have enacted limits on but don’t completely ban the use of credit when making auto insurance decisions.

Key highlights

• Credit-based insurance scores differ from FICO credit scores but are calculated using similar factors, such as payment history and debt levels.
• According to industry research, drivers with poor credit are more likely to file a claim than drivers with good credit.
• Making timely payments and reducing debt balances can help boost your credit-based insurance score and, over time, lead to lower premiums.

What is a credit-based insurance score?

Credit-based insurance scores are calculated using data from a consumer’s credit history. Those scores are then used by insurers in setting policy premiums and deciding whether to offer or renew coverage.

“Insurance is about transferring risk, (and) not everyone has the same risk,” says Richard Gibson, senior casualty fellow with the American Academy of Actuaries. “The insurance scores are intended to predict propensity for insurance claims.”

Insurance companies try to gauge the risk of someone filing a claim by looking at several factors, such as age, geographic region and driving record. Insurers also say there is a relationship between credit and risk.

A 2005 study from the Texas Department of Insurance found that those with higher credit-based insurance scores filed fewer claims than those with lower scores. As a result, insurers paid out less in claims to those with higher scores.

How are credit-based insurance scores calculated?

FICO Insurance Scores, LexisNexis Attract and TransUnion TruVision Insurance Risk are all services insurers may use when making policy and rate decisions.

Most companies don’t publicize how they calculate credit-based insurance scores. The one exception is FICO, which is transparent about the makeup of its regular credit scores and its insurance scores. While both use roughly the same information, they weigh the data differently.

Here’s how they compare:

How are credit-based insurance scores used to set rates?

Insurers use CBIS to approve or deny auto insurance policy applications, renew existing policies and set rates for new and existing customers.

“The idea is that a person with better credit is essentially more financially responsible,” says Otto Larson, vice president and partner with Wallace & Turner, an Ohio-based independent insurance agency. And that, Larson says, may be correlated to safer driving and fewer insurance claims.

While credit-based insurance scores may be weighed heavily by some companies, they may be less of a factor elsewhere. For this reason, it’s always smart to request quotes from several companies when shopping for auto insurance.

“Each company has its own pricing model,” Larson says. “(Credit is) not the sole factor. There are more variables that go into car insurance pricing.”

While only a few states outright ban the use of CBIS, others restrict their use. For instance, Nevada prohibits a company from denying insurance or canceling a policy based on credit alone. Check with your state’s insurance department or commission to see what restrictions may be in place where you live.

How much is car insurance if you have poor credit?

Drivers with poor credit can pay hundreds if not thousands more for car insurance than people with good credit. According to CarInsurance.com, Nationwide’s average annual rate for full coverage for a driver with good credit is $1,548. But that same policy costs $2,259 on average for a driver with poor credit. By comparison, Allstate charges an average of $2,509 per year to drivers with good credit but $4,177 for those with poor credit.

It’s interesting to note that those with poor credit aren't penalized for their score, Gibson says. Instead, insurers discount the cost for those with better scores.

“When credit scores are implemented in a rating plan, it usually results in more people getting decreases than increases,” he says.

Here’s a look at how typical insurance rates vary at major insurers for drivers with good credit versus those with poor credit, based on data from CarInsurance.com.

The rates below were collected from auto insurance comparison site CarInsurance.com and its data partner Quadrant Information Services for single, 40-year-old male and female drivers of a 2023 Honda Accord LX with a good insurance score and no violations on their record for full coverage insurance policy with liability limits of 100/300/100 and a $500 comprehensive and collision deductible.

What factors influence my insurance credit score?

Every insurance carrier has its own method for using credit history to determine rates, but all of them consider the following factors to one degree or another:

• Payment history. Timely payments are the most critical factor in FICO Insurance Scores. Late payments, delinquent accounts and bankruptcies can all negatively impact a score.
• Debt owed. Companies may look at how much you owe, how many different accounts have balances and what percentage of your credit lines you use.
• Credit history. Established accounts are preferable to a credit history filled with newer lines of credit.
• New credit activity. Recent applications for loans, credit cards and lines of credit could indicate that someone is in financial trouble and seeking access to money for that reason.
• Type of credit. This looks at how someone’s debt is distributed. For instance, it considers whether someone has unsecured credit card debt (not backed by collateral) or secured debt (which does require collateral) such as an auto loan or mortgage.

How can I improve my credit score?

While you may not be able to change some factors that insurers consider—such as your age or geographic location—consumers can change their credit score.

“One of the ways people can control their automobile insurance costs is by managing their credit,” Gibson says.

To improve your credit, and thus your credit-based insurance score, try the following:

• Do pay down debt. Reducing the amount you owe can be one of the most effective ways to improve a credit score.
• Don’t close accounts. Don’t make the mistake of closing an account after you pay it off. Credit scores are based, in part, on the time your account has been open and how much credit you have available compared to how much you are using. By closing an older account, you could negatively affect both those factors.
• Do request credit increases. Maxing out your credit cards can reduce your credit score, but asking for a credit increase can create a buffer and lower your credit utilization ratio.
• Don’t spend to your limit. Of course, you will negate that higher limit's benefit if you max out your card again. Ideally, you want to only use up to 30% of your available credit.
• Do pay on time. Making payments on time is another key component of a good credit score. If you struggle to remember due dates, consider automating payments.

Frequently asked questions

Does an insurance quote hurt your credit score?

While insurance companies may review your credit as part of providing a quote, you shouldn’t have to worry about that hurting your score, according to Larson.

A so-called “hard” inquiry on your credit report can temporarily cause your score to drop by a few points. These occur when you apply for a credit card, loan, mortgage or other line of credit.

A “soft” inquiry occurs when a company checks your credit for other reasons, such as to qualify you for insurance coverage. These inquiries do not affect your credit score.

Where can I see my credit report?

While credit-based insurance scores are not available to the public, you can review the credit report on which these scores are based.

AnnualCreditReport.com is the official site to request free credit reports from Experian, Equifax and TransUnion. By law, these companies must provide you with a free credit report each year, but they have begun voluntarily offering free reports weekly.

It’s a good idea to review your report regularly and dispute any incorrect information you find.

Can I get car insurance discounts if I have poor credit?

Insurers offer a variety of discounts to car owners, and these are typically given regardless of someone’s credit. Some popular options include:

• Bundling. You can save up to 10% by consolidating policies, such as home and auto, with the same insurer.
• Multi-car. If you have more than one vehicle insured, you could save up to 25% on your policy.
• Good driver. Some carriers offer discounts of up to 30% on premiums for those with clean driving records.
• Good student. High school and college students who maintain a certain grade point average may save up to 35% on their policies.
• Loyalty. Customers who choose to renew with their current insurer may save up to 10%.

For assistance in finding the discounts that apply to you, consult an independent insurance broker. “Our job is to advise our clients on the best options for them,” Larson says.

Methodology

Editors collected rate information from auto insurance comparison site CarInsurance.com and its data partner Quadrant Information Services for single, 40-year-old male and female drivers of a 2023 Honda Accord LX with a good insurance score and no violations on their record for full coverage insurance policy with liability limits of 100/300/100 and a $500 comprehensive and collision deductible.

In addition, we also calculated rates for these same hypothetical drivers, but with poor credit history.

We analyzed more than 53 million quotes, more than 34,000 ZIP codes and 170 insurance companies nationwide.

Note: 100/300/100 means up to $100,000 for the medical bills of those you injure, up to $300,000 per accident for bodily injury liability for all persons injured in one accident, and $100,000 to repair other drivers’ cars and property that you damage.