Does your credit score affect your car insurance rates?

Insurance companies use many factors which decide how much of a risk you are and your insurance rate. The main factors are, where you live, driving record, even what kind of car you drive. But some factors that are less obvious, include your credit score.

Credit scores have been used in determining insurance rates for at least 20 years. Credit is considered a rating factor for most US drivers. Insurance companies assess and price your risk by using statistics. Companies people with lower credit scores statistically file more claims than those with higher scores.

A Federal Trade Commission study in 2007 found that drivers with low credit scores are more likely to file a claim than drivers with higher credit scores. Also claims filed by drivers with low credit scores cost almost twice the dollar amount as those filed by higher-credit drivers.

Credit Score Affects Rates  

California, Massachusetts, and Hawaii insurance companies are not legally allowed to use credit scores as a rating factor per state regulations. In the other states and territories, credit has a huge impact on  auto insurance rates.

Here’s how your credit rating can affect your car insurance payment:

  • Drivers with poor credit (scores of 524 or below) pay more than twice as much for car insurance as those with excellent credit scores (of 823 or above).
  • Drivers can increase their credit scores by one tier (e.g. from poor to fair) to save an average of 17% on their annual auto insurance premiums.
  • Improving your credit score from poor to excellent would yield 53% savings (an average of $1,281 per year).

Your credit score costing you on car insurance? Below are some other rating factors besides credit score that will affect your rates.

What are rating factors?

Rating factors are characteristics about  your behaviors which insurance companies use to figure out the likelihood of you filing a claim. Insurance companies enter your rating factors into their rating algorithms to determine your premium (what you pay for insurance coverage).

Insurance companies are taking a risk when they insure you. The risk that you will file a claim and a risk that you’ll be able to pay your premiums. Each person has a unique risk based on their rating factors related to their driving history and habits. This is how your rates differ from your neighbor’s.

The most critical and common rating factors:

1. LOCATION

Zip Code

Believe it or not, location matters right down to the zip code. Insurance companies want to know the zip code where you primarily park your vehicle. Zip codes gives insurance companies an idea of the crime rates, weather trends, population density, which indicate likelihood of you filing a claim.

2. WHAT YOU DRIVE

Cars of higher value will cost more to repair or replace. This makes them a higher and more costly risk to your insurance company.

Vehicle Make and Model

  • Luxury cars are the most expensive vehicle types to insure. Followed by “green” cars (hybrids, electric, etc.), trucks, sedans, SUVs, and vans. Luxury cars are more expensive to fix than more mainstream, cost-effective cars.
  • Cars with high-tech features may be more expensive to repair, so their rates may be higher.
  • Some foreign cars are more expensive to repair than domestic cars, so their rates may be higher.

Vehicle Age

  • A 5-year-old car is about 11% less expensive to insure than a current model. This is because the total value of your car is lower, making it less of an expense to repair or replace.

car insurance rating factors

3. HOW YOU DRIVE

Driving habits determine how likely you are to get in an accident. The higher the chances, the higher your premiums.

Primary Vehicle Use

These are mostly broken down into Personal/Commuting (the most common, as it’s for general commuting to work or school, car-pooling, and running errands), Pleasure (for vehicles that get occasional use), Farm (these require special license plates and for use in farming or ranching, Business (think realtors, home health nurses, traveling salesmen), and Commercial (probably NOT you: 18-wheeler, dump truck, etc.)

For Uber, Lyft or other rideshare drivers, you would get a personal policy with an endorsement for ridesharing. If you drive at all for delivery, you would get a Commercial policy.

Annual Mileage

Auto insurance rates do rise when you put more miles per year on the odometer, but not by much. The biggest increase in the national annual average premium occurs for those who drive more than 7,500 miles per year, which most Americans do. California is the only state with significant premium increases as miles driven increases, with a 25% difference in average annual premiums between those who drive 7,500 miles per year or fewer.

Your Driving and Claims History

Any accidents or tickets in the past three years would affect your car insurance rates – potentially by a lot. Violations such as DUIs, speeding, reckless driving, and causing an accident can hike your rates way up. In fact, a single DUI can raise rates more than $1,000 a year. (Yet another reason to never drink and drive!)

Any other claims you file with your insurance company could also affect your rates. You can access your CLUE report to see your claims history.

Your Coverage History

Whether you’re buying a new car, changing your policy, or switching insurance companies, maintaining continuous coverage is incredibly important because companies view drivers that are already insured as being financially responsible and therefore a lower risk. It does not matter if your coverage history is with different insurance companies, but it does matter how long you’ve been covered (rates generally drop at 6 months, 1 year and 3 years). Insurance companies consider a lapse in coverage (even for a day) as financially irresponsible behavior, so always make sure you’re covered.

4. WHO YOU ARE

Your Age

There’s nothing you can do about this rating factor, but it’s worth knowing. Statistically, drivers get in fewer accidents the older they get and the more driving experience they gain – to a certain age, that is. Teens pay the highest rates by far, and rates drop each year until age 60, when they start to increase slightly.

Your Marital Status

Insurance companies have found that married couples are statistically less risky to insure because they are less likely to file a claim than single, divorced, separated, or widowed drivers.

Your Gender

In most states, men pay slightly more for car insurance than women because men are statistically involved in more accidents than women – but not by much.

Your Credit Score

As with many insurance rating factors, your credit score’s impact on your car insurance has to do with statistics and the likelihood that you will file a claim. The higher your credit score, the better. Raising your credit score by one tier could save you an average of 17% on your annual insurance premium.

Your Home Ownership

Owning your own house or condo generally indicates that you are financially responsible. According to insurance companies, the more financially responsible you are, the less likely you are to file a claim.

Your Level of Education

Insurance companies may ask what your highest level of education is, but the savings are minimal. With no high school diploma, drivers only pay $36 more per year than if they held a Ph.D. Some insurance companies offer a “good student” discount to any drivers listed on the policy who are enrolled in schools and can prove a “B” average or better.

car insurance rating factors

*Do All Insurance Companies Use All These Rating Factors?

Nope.

Since insurance is regulated by each individual state rather than the federal government, some state insurance agencies may prohibit the use of certain rating factors. For example, in California, Massachusetts and Hawaii, insurance companies cannot use a driver’s credit score as a rating factor. Insurance companies have to file their rating algorithms with the insurance agencies in every state in which they operate, and those agencies make sure the companies don’t engage in illegal or discriminatory rating practices.

It’s also important to consider the variations among the insurance companies themselves. We explained some of the key differences here for you:

Insurance Distribution

  • Direct: When insurance companies interact directly with consumers online without an agent (Examples: Geico, Progressive, Esurance)
  • Captive: When insurance agents/brokers sell a single insurance company’s coverage to consumers, usually through local agents at a brick-and-mortar office (Example: State Farm)
  • Independent: When insurance agents/brokers sell multiple insurance companies’ coverage to consumers

Underwriting Strategies

If you’ve ever wondered why there are so many different insurance companies, it’s because there are so many different people. These varied strategies represent how different companies focus on drivers bucketed by some traits they share which statistically indicate a certain level of risk. For example, some insurers specialize in drivers with multiple accidents, poor credit, and DUIs, while others target drivers who own multiple cars and live in rural areas.

  • Non-standard (higher risk)
  • Standard (average risk)
  • Preferred (lower risk)

What Can You Do to Affect Your Rates?

1. Credit Health

The first step to better credit is understanding what your credit score is. Checking your credit report atleast once every four to six months. Regularly view what your credit score is. (Check your credit report for free at Credit.com.) When you know where you stand,  improving your credit health will be a lot simpler.

2. Practice Financially Smart Behavior

Now that you understand your overall credit health, you can take specific steps to improve it. Keep in mind that no matter what your credit score is, you need to practice financially smart behavior. This means developing a savings plan, managing your debt, and monitoring your credit. Review Credit.com’s Personal Finance Learning Center for more tips on developing and maintaining financially smart behavior. 

3. Check Your Insurance Rates

Many factors can impact your insurance rate, and these factors can change relatively often—so check your rates regularly. Coverage lapses, violations, claims on your driving record, and even your age can have a big impact on your rates. Compare auto insurance rates at least every six months to make sure you have the right coverage and you’re paying the best rate for it.

Keep an eye on your credit report, your financial habits, and your insurance rates for the best deals.

 

 

 

 

 

 

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