How Will Bad Credit Affect My Auto Insurance?

Published on August 23, 2019 by CreditFresh

woman riding in a vehicle putting her head and right arm outside the window while travelling the road

Learning how auto insurance scores affect the premiums you pay on car insurance may help you save money on car insurance. If you have an idea of what factors affect it and how to work towards improving it, you may be able to impact your score and lower your premiums on car insurance.

Even if you aren’t required by law to have it, auto insurance may be a good idea.

It doesn’t matter how good of a driver you are, and it doesn’t matter what vehicle you drive. Whether you have a flawless driving record with a brand-new sports coupe, or an accident-prone sedan held together by duct tape, every driver should have insurance.

After all, you never know if you’ll be involved in a collision. If you’re found at fault without insurance, you may owe thousands of dollars in repair bills and/or medical expenses.

But let’s be honest — auto insurance isn’t cheap. On average, it adds roughly $941 to your total auto expenses every year. You may have to pay even more depending on your credit score.

If you want to know why your credit score matters when you’re behind the wheel, you’ve come to the right place. Scroll down to find out how a credit score may affect auto insurance premiums.

What is an Auto Insurance Credit Score?

An auto insurance credit score — also known as a credit-based insurance score — is somewhat similar to a general credit score, with some major differences.

Let’s take a look at what it’s used for and how it impacts you.

  1. It’s a risk assessment tool. When a lender looks at your overall credit score, they may be assessing your creditworthiness. They look through your credit history to make a judgement call about your current and future ability to pay back loans. When an insurance company checks your auto insurance credit score, they aren’t using it to evaluate you as a borrower. They look at your credit-based insurance score to predict the odds you’ll fill out a claim.
  2. It’s a three-digit number. Much like your overall credit score, your credit-based score is also a three-digit number. However, it’s rare you’ll have the same number for both. That’s because these scores run on different scoring models. While your financial credit score usually ranges between 300 and 850, your credit-based insurance score may fall anywhere between 200 and 997.
  3. It impacts the prices you pay for auto insurance. Your general credit score influences the types of financial options you have. If you have a low score, you may face barriers that people with higher scores don’t. Depending on how low your score is, you may end up paying higher rates for lower limits. Your auto insurance credit score controls what you pay in a similar fashion. Imagine the relationship between your auto insurance score and your car insurance premiums like a teeter-totter. If your score goes up, your premiums may go down. But if your score starts to dip, you may see your premiums begin to rise. It’s important to note your credit-based insurance score is just one of many factors involved in assessing your risk. Insurers also consider the following information when setting your rates:
    • Age: Young and inexperienced drivers tend to pay more.
    • Location: Detroit drivers tend to pay the highest premiums in the country, while drivers in Winston-Salem, N.C. tend to pay the lowest.
    • Sex: Data shows women tend to be safer drivers than men, so they may generally pay lower premiums.
    • Marital status: Married drivers tend to be in fewer accidents, even if they’re inexperienced. As a result, they pay less than their single counterparts.
    • Driving record: If you’ve been in multiple collisions, you’ll pay more for your insurance. A clean record may help keep your payments low.

Do All Insurers Require Credit Checks?

No, some people won’t have to worry about these scores. It depends on where you call home.

Setting insurance rates based on credit scores is prohibited in California, Hawaii, and Massachusetts. If you live here, your insurer should use other factors such as your age, location, sex, marital status, and driving record to set your premiums.

However, if you live in the other 47 states, you’re more likely to undergo a car insurance credit check.

brown and white dog with its head outside a backseat window of a driving car

How is a Credit-Based Insurance Score Calculated?

Your score is heavily based on your credit report. When generating your score, popular scoring models like the FICO scoring model may consider your:

  • Payment history
  • Amounts owed
  • Length of credit history

However, they may not use all the data that your credit report generates in these categories.

A recent Consumer Reports study shows insurers cherry-pick roughly 30 out of a possible 130 elements from your report before feeding them into their own proprietary score. Because they pick and choose what data they use, your score isn’t easy to predict.

Generally, insurers claim there’s a strong correlation between this score and future claims. They look into your report to predict the likelihood of you making a claim, believing that people with bad credit generally file claims more often.

As a result, drivers with poor credit tend to pay twice as much for car insurance, on average, as those with exceptional credit. Meanwhile, people with no credit tend to pay 67 percent more in insurance, on average, than people with excellent credit.

What is a Good Auto Insurance Score to Have?

As a general rule, higher is always better. But when it comes to exact numbers, it depends on the credit reporting agency . Each company sets its own benchmark for good scores.

Credit Score AgencyGood Score
FICO700 and above
LexisNexis776 and above
TransUnion770 and above

That being said, your score may be tempered by other factors, like your driving record and location.

Depending on your overall profile, a score that’s “good” to TransUnion may not be good enough to lower your premiums if you’re single and living in Detroit with a bad driving record.

However, if you’re married and living in Winston-Salem with a flawless record, a good score may help you earn even lower premiums.

Person driving car

How Do You Find out Your Auto Insurance Score?

You may guess whether you have a good credit-based insurance score if you’ve checked your credit report recently. But this will only be a guess.

If you’re in the market for a new policy, guessing your insurance costs based on credit scores you’ve generated in the past won’t be an accurate gauge of what you’ll end up paying.

For that, you’ll have to check with one of the major credit agencies or a service like CreditKarma.

Does Checking Your Auto Insurance Credit Score Lower it?

Here is some good news — when insurers check your credit, it won’t affect your score. Regular readers of the CreditFresh blog will know that a soft pull or soft inquiry does not affect your score.

But for those of you who aren’t familiar with this term, here’s a quick breakdown. A soft inquiry will not leave a record on your credit report, so it can’t affect your score.

A hard inquiry, on the other hand, will show up in your report, and it may impact your score. Most mainstream lenders and credit card companies perform a hard inquiry when reviewing applications.

How Often Do Insurers Check Credit Scores?

Insurers don’t all follow the same methods, so there isn’t a uniform answer to the question of “How often do insurers check credit scores?”

Generally, you may undergo a credit check by an insurer when you apply for a new policy.

How to Improve Your Credit-Based Insurance Score

Chances are, it’s likely auto insurance providers look at your insurance score, so you’ll want to do what you can to improve this number.

Generally, improving your overall credit score may have a positive impact on your insurance score, but this is by no means definite. The same things that build good credit in your financial file may potentially also lower your auto insurance rates.

So how do you try to improve your score? You’ll want to set positive habits that include

  • Paying your bills on time
  • Paying off debt and keeping your credit utilization low
  • Check your credit report at least once a year to correct for errors
  • Apply for new credit accounts only when really needed

How long this takes depends on many different factors, including your starting point. Your credit score is a dynamic number that’s affected by many different factors. You’ll need to maintain healthy financial habits across the board if you want to potentially help your score.

red and black calculator on top of a piece of paper showing a grey-scale pie graph

Other Ways to Lower Your Premiums

Although your insurance score will play a large role in your rates, there are other factors influencing what you’ll pay.

The next largest component to your premium is your driving record. A spotless record goes a long way to keeping your insurance affordable.

Practicing safe driving may lower your rates, so make a point of driving with care in the future. Avoid things like double parking, speeding, tail-gaiting, and texting while driving.

In other words, don’t do things you know are wrong, hoping there won’t be a parking or police officer around to notice.

woman in ripped black jeans and brown shirt holding the driving wheel of a car with her left arm

If it’s been a while since you first got your license, it wouldn’t hurt to enroll in a driving class to refresh your memory about the laws. If you find yourself getting irritated by other drivers, check out these tips on managing road rage.

What Will You Do about Your Auto Insurance Score?

Owning and driving a car is a big expense. Between gas, maintenance, tolls, and parking, things to add up.

If car insurance is not legally mandatory where you live, skipping it may seem like an easy way to save each month. But it’s not worth the risk. Auto insurance offsets the cost of any damages or injuries sustained in a collision, making it a wise financial decision.

Reducing what you pay is a more practical solution to costly insurance.

When it comes to lowering your rates, time plays a factor. You may simply have to wait until a speeding fine or a late bill payment falls off your record to see a different in your rates.

Until that happens, focus on what you can do now. Improving your driving record and building credit may potentially help you lower your premiums and save money in the future. They also may not but building good financial habits is always a good idea.

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.