Your credit score can impact your life in a lot of ways, including your ability to get a loan, buy a home and even get a job. But did you know that your credit can also impact your car insurance? In most states, your credit score could affect how much you pay for auto insurance. The national average full coverage car insurance premium for drivers with excellent credit is $1,487 per year. For drivers with poor credit, the average annual premium jumps to $3,873, a 160% difference.
Bankrate’s extensive research could help you understand why credit can impact your car insurance premiums, to what extent your rates could be affected and what you can do to get the lowest rates possible. Our team of insurance editors and writers spoke with industry experts, analyzed car insurance rates from Quadrant Information Services and gathered tips to help you take control of your credit-based insurance score.
Why does credit affect car insurance rates?
“When you apply for car insurance, the company checks your credit rating,” explains John Espenschied, owner of Insurance Brokers Group and an insurance expert with over 20 years in the industry. “If your score is low or if there is an indication that you might be living beyond your means, it may affect whether you get coverage at all.”
Like your driving record, your credit rating is a helpful tool for car insurance companies to use when assessing your risk as a driver. “Yes, most car insurance companies use credit scores as one of many factors affecting car insurance premiums,” affirms Adrian Mak, CEO of AdvisorSmith. “Other factors considered include driving history, claims history, ZIP code, vehicle type and many other factors.”
“Analysis of car crash data shows that credit scores can accurately predict the risk that a policyholder will crash or file a claim against a policy,” Mak adds. “Drivers with higher credit scores tend to get into fewer crashes and file fewer claims than those with lower scores.”
Therefore, the drivers who have higher credit scores are generally perceived as lower risk and are offered lower rates than drivers with lower credit scores.
What are credit-based insurance scores?
Many auto insurance companies will use what is known as a credit-based insurance score to quickly and easily identify risk among policyholders. Auto insurance companies generally use this information to assess your risk and determine how likely you are to make timely payments or to file a claim.
“Credit-based insurance scores are a new way of calculating premiums,” comments Espenschied. “The most common credit score is the FICO score, and companies such as Fair Isaac Corp. use it to help calculate premium costs based on your driving history and risk assessment.”
A credit-based insurance score reviews your credit report to assess your risk in simple numerical form. This is usually a strictly credit-based identifier, so it does not include your current employment, income history or other personal details. Instead, it sticks mostly to your payment history and considers your total debt when assigning a score. An insurance company then translates that score into a metric of its own so that customer service agents cannot see your actual credit score.
How much will my car insurance cost based on my credit rating?
The national average cost of car insurance is $565 per year for minimum coverage and $1,674 per year for full coverage. However, depending on your credit score and other rating factors, your premium could be much higher or lower.
The average cost of auto insurance also varies based on your gender, although some states do not allow gender to be used as a rating factor. Males often pay more than female drivers, since men are more likely to get into accidents than women. The table below shows the average full coverage premiums for men and women with various credit tiers.
|Poor credit||Average credit||Good credit||Excellent credit|
Your credit score is not the only factor that impacts your car insurance rate. Where you live can also be a significant factor.
Average cost of insurance by state and credit rating
Not all states use your credit score as a factor to determine car insurance rates, but most do. California, Hawaii, Massachusetts and Michigan have banned the practice of using credit scores to calculate car insurance rates. Recently, Washington also banned the use of credit as a rating factor, although the current ban is only effective for three years (until 2024). Maryland, Oregon and Utah also limit the use of credit as an auto insurance rating factor. In these states, there are regulations limiting how and when insurance companies can use credit as a rating and underwriting factor.
Unless you live in these states, your credit score will likely have an impact on your auto insurance premiums. But because geographic location also plays a role, the state you live in and even your ZIP code will also impact your premium.
“States have varying insurance premiums for a variety of reasons,” Mak explains. “The incidence of crashes in some states is higher than in others. Impacts are due to the mix of the ability of drivers in the state as well as road safety. Each state’s premiums are also affected by the court system and the cost of medical care in each state, with some states’ courts offering more generous awards and higher-cost medical care being drivers of higher premiums.”
Depending on where you live, this is how your credit could impact your full coverage auto insurance premium:
|State||Poor credit||Average credit||Good credit||Excellent credit|
|District of Columbia||$3,072||$2,062||$1,855||$1,711|
*These states do not allow insurance companies to use credit as a rating factor.
You may have noticed that Michigan and Washington still show quite a bit of variance in their rates. This is likely because the credit bans are recent; Michigan’s credit ban went into effect on July 1, 2020 and Washington’s temporary ban was effective on March 22, 2021. This means that there are still existing policies in place that were initially rated with credit score as a factor. Within a few years, these policies should all have renewed into the new credit-banned system and the rates should even out across the credit tiers.
How to improve your credit score
There are a variety of situations that can negatively impact your credit score, from past-due bills to taking out a new loan. But your credit rating is not set in stone. There are ways that you can improve your credit score:
- Check your credit report: You are entitled to one free credit report per year. Checking your credit score may help you to catch potential downturns or issues before they become problematic.
- Make timely payments: Late payments will only work against you, further damaging your credit report. Making payments on time could begin to establish a long-term pattern that benefits your finances.
- Work on your credit utilization rate: When you have multiple credit cards that are all maxed out, it can negatively impact your credit score. An insurance provider could then worry that you are overextended financially and will be unable to make your insurance payments. It may be beneficial to pay down your outstanding debt so your debt-to-income ratio is below 30%.
- Take a break from new accounts: When you apply for a new loan or credit card, lenders often run inquiries that can damage your credit score. Instead, stick to the accounts you have and focus on paying those balances down so you can improve your overall debt-to-income ratio.
For most drivers in the U.S., credit score affects how much you pay for car insurance. If you are trying to lower your auto insurance premium, improving your credit score could result in long-term benefits.
Frequently asked questions
What factors impact my credit score?
There are several factors that impact your credit score beyond whether you make your payments on time. Other factors that impact your credit score include how many accounts you have, how long they have been open and how many recent inquiries you have on your account. Things like late payments, high outstanding balances and accounts in collection can all negatively impact your score.
What is the difference between a hard inquiry and soft inquiry?
There are two types of inquiries that lenders may use when running your credit. A hard inquiry results in a permanent record on your credit score. A soft inquiry, on the other hand, does not affect your credit score. Applying for insurance policies counts as a soft inquiry — your credit score is reviewed but is not impacted by the act of getting auto insurance quotes.
Where can I see my credit report?
Under the Fair Credit Reporting Act (FCRA), you are legally entitled to a free credit report each year. Obtaining your free copy allows you to check the report for any mistakes or inaccuracies that could harm your score. If you see incorrect information on your credit report, be sure to report it immediately to the appropriate credit bureau so your credit score does not suffer.
Bankrate utilizes Quadrant Information Services to analyze 2021 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Quoted rates are based on a 40-year-old male and female driver with a clean driving record, credit status and the following full coverage limits:
- $100,000 bodily injury liability per person
- $300,000 bodily injury liability per accident
- $50,000 property damage liability per accident
- $100,000 uninsured motorist bodily injury per person
- $300,000 uninsured motorist bodily injury per accident
- $500 collision deductible
- $500 comprehensive deductible
To determine minimum coverage limits, Bankrate used minimum coverages that meet each state’s requirements. Our base profile drivers own a 2019 Toyota Camry, commute five days a week and drive 12,000 miles annually.
Rates were calculated based on the following insurance credit tiers assigned to our drivers: “poor, average, good (base), and excellent.” Insurance credit tiers factor in your official credit scores but are not dependent on that variable alone. The following states do not allow credit to be a factor in determining auto insurance rates: CA, HI, MA.