How credit affects auto insurance: Rates could increase up to 72%
Kacie Goff /October 15, 2020
- Can credit scores be evaluated for auto insurance rates?
- How do insurers and credit agencies evaluate scores differently?
- Does credit score affect auto insurance rates?
- Does credit affect car insurance rates more in certain states?
- How other factors can affect your auto insurance rates
- The takeaway
Before offering you a policy, insurance providers analyze your risk profile by looking at things like your driving history, as well as personal details, such as age or marital status. This evaluation is used in determining your premium.
But there’s another somewhat surprising factor that affects your premiums in all but three states: your credit score. Unless you live in California, Massachusetts, or Hawaii, expect your credit score to affect how much you pay to insure your car, at least to some degree.
You may already be familiar with your credit score as determined by the three major credit bureaus, TransUnion, Experian, and Equifax, it’s important to know that insurers assign you an insurance credit score that varies from your traditional credit score. While your credit score plays a role in that insurance score, additional factors are also involved.
It’s important to understand why credit affects car insurance. Carriers’ proprietary credit-based insurance score provides a way to check two things: your likelihood of making insurance payments on time and your likelihood of filing a claim.
While insurance carriers use a more complex algorithm to calculate premiums based on your insurance credit score, for the sake of this study, Coverage simplified the ratings by classifying insurance scores into three general categories: “good,” “average” and “poor” credit. This is to give you a general idea of the premium impact by credit tier.
Can credit scores be evaluated for auto insurance rates?
Short answer: yes, in most states. California, Massachusetts, and Hawaii are the exceptions here.
Michigan is a bit of a gray area, too. In Michigan, you might be mostly off the hook. Insurers can’t use your credit score, but they can look at your credit information. That means a low score won’t necessarily increase your rates, but a history of missed payments might make an insurance provider wary, and could ultimately affect your rates.
Let’s look closer at why credit affects car insurance rates. Studies, including a Congress report by the Federal Trade Commission, have shown that a lower score means you’re a higher risk for your insurer. A poor score directly correlates to an increased risk of filing a claim.