In the United States, having a good credit score can affect many aspects of your life, including your ability to obtain credit, rent an apartment, and even secure a job. One lesser-known way that your credit score can affect your finances is through your car insurance rates.
Car insurance companies in the US use a variety of factors to determine your insurance rates, including your age, driving record, the type of car you drive, and your credit score. While your credit score might seem like an odd factor to consider when it comes to car insurance, insurance companies use it as a way to assess your risk as a driver.
How Credit Scores are Used in Car Insurance
Car insurance companies in the US use a statistical analysis of various factors to determine the likelihood of you filing a claim. The higher the likelihood of a claim, the higher your insurance rates will be. In addition to your driving record and other personal information, car insurance companies also use your credit score as a factor in determining your insurance rates.
Research has shown that people with lower credit scores are more likely to file insurance claims. This could be due to a number of reasons, including financial instability and a lack of responsibility in other areas of their lives, such as paying bills on time.
Insurance companies use credit-based insurance scores, which are calculated using information from your credit report. This information includes your payment history, outstanding debts, the length of your credit history, and the types of credit you have. Using this information, the insurance company calculates a credit-based insurance score, which is then used to determine your insurance rates.
How Your Credit Score Affects Your Car Insurance Rates
Your credit score can have a significant impact on your car insurance rates. In general, people with higher credit scores will pay lower insurance rates, while people with lower credit scores will pay higher rates.
According to a study by The Zebra, the average annual car insurance premium for a driver with excellent credit (a score of 800 or higher) was $1,427 in 2020. In comparison, the average premium for a driver with poor credit (a score of 300-579) was $3,283. This means that drivers with poor credit pay more than double what drivers with excellent credit pay for car insurance.
It's important to note that not all states allow car insurance companies to use credit scores as a factor in determining insurance rates. California, Hawaii, and Massachusetts have banned the use of credit scores in car insurance, while other states have limited how credit scores can be used.
Improving Your Credit Score to Lower Your Car Insurance Rates
If you have a low credit score and are paying high car insurance rates as a result, there are steps you can take to improve your credit score and lower your insurance rates. Some tips to improve your credit score include:
- Paying bills on time: Late payments can have a negative impact on your credit score. Make sure you pay all bills on time to avoid late fees and penalties.
- Paying off debt: High levels of debt can lower your credit score. Make a plan to pay off your debts as quickly as possible.
- Checking your credit report: Errors on your credit report can lower your score. Check your report regularly and dispute any errors you find.
- Keeping old credit accounts open: The length of your credit history is a factor in determining your credit score. Keeping old credit accounts open, even if you don't use them, can help improve your score.
Conclusion
Your credit score can have a significant impact on your car insurance rates in the US. While not all states allow car insurance companies to use credit scores in determining rates, many do. If you have a low credit score, taking steps to improve it can help lower your insurance rates and save you money in the long run.
