The Influence of Your Credit Score on Car Insurance Rates

Credit Score Young african smiling man with cap and sunglasses waiting inside a yellow car. He is grabbing the steering wheel while laughing at camera.

When shopping for car insurance, you might not realize your credit score has an impact on what you’ll be offered. Not only does your credit score influence which insurance companies will provide you with coverage, but it can also affect the rate of your premium. We’ll take a deeper look at credit scores, what’s considered “good,” and how it all impacts car insurance.

Understanding Your Credit Score

How Credit Scores Are Calculated

Credit scores are determined through the evaluation of several factors, including:

  • Your payment history: How timely you pay your bills is the biggest influencing factor on your credit score. Do you make minimum payments before the due date or more frequent payments in higher amounts? These habits will positively affect your score.
  • How much debt you have: Evaluating this aspect of your credit score involves examining the ratio of your credit card balances to their available limits and any remaining loan balances to their original amounts. The faster you pay your balance in full, the better.
  • The age of your credit history: The longer you’ve been using credit, the “older” your history is considered. Older accounts indicate more experienced credit users, which will positively influence your score.
  • Your credit types: If you’ve proven you can handle multiple types of credit, including revolving credit and installment loans, your credit score will benefit.
  • Your recent credit activity: The last major determining factor of your credit score is an evaluation of your recent activity. Any applications you’ve submitted that require credit checks will be noted on your account for 12-24 months, but this aspect of the evaluation will only consider your last 3-6 months of activity. Other factors, such as accumulating new debt or paying it off, will also play a determining role.

What Constitutes a “Good” Score?

Now that you understand the evaluation process, what kind of score do you want? While not all evaluations have the same scoring range, the two most commonly used credit scoring systems are FICO and VantageScore, both of which use the 300-850 scale. The typical VantageScore range evaluations using the 300-850 scale look like this:

  • 781-850: A
  • 720-780: B
  • 658-719: C
  • 601-657: D
  • 300-600: F

Most Americans have a credit score of 650 or above, but it’s good to aim for at least 700. A higher credit score increases your chances of being offered car insurance at a lower rate.

How Your Credit Score Affects Car Insurance Rates

Insurance Companies Use Your Credit History to Determine Risk

In the mid-1990s, data analysis companies determined that certain trends in credit history could correlate to driving behaviors, and they began selling this information to insurance companies. Through extensive analysis, these companies came up with a list of specific habits of credit users that could accurately predict their likelihood of filing car insurance claims for things such as auto accidents. Using these trends, insurance companies were better able to calculate competitive premiums that allowed them to cover their losses as well as make a profit.

Credit History Factors that Predict Driving Behavior

Data analysis companies evaluated several financial behaviors to find predictive trends in driving behaviors. Specific credit management factors they determined to correlate to driving habits included:

  • Successful or unsuccessful payment history
  • How many credit cards were owned
  • How timely balances were paid
  • Current outstanding balances
  • What kind of credit was used (i.e., mortgages, other loans, etc.)
  • How high the balances were allowed to get

The determining factors were essentially identical to the criteria used by companies like FICO and VantageScore to calculate credit scores. This led car insurance companies to start using credit scores as an important and influential piece of their premium rate calculation process.

How Credit History Trends Correlate to Driving Trends

From the findings of the study, it was determined that people with higher credit scores tended to behave more responsibly with their credit, and this trend carried over to their driving habits. Along with being more responsible, those with higher credit scores also tended to be more risk-averse than those with lower credit scores. The same impulse that caused people to pay their bills on time also caused them to drive safely.

Financial habits, such as keeping balances low, making payments in advance, and owning fewer credit cards, often generate high credit scores. These same habits also seem to apply to drivers that go the speed limit, come to complete stops when necessary, keep noise distractions to a minimum, maintain safe driving distances, utilize turn signals and make safer, more informed decisions while on the road.

On the other hand, failure to pay bills on time, owning multiple credit cards and accumulating excessive outstanding balances often creates low credit scores. Drivers with irresponsible financial history are found to be more likely to speed, tailgate, fail to use their turn signals, talk or text on a cell phone while behind the wheel, fail to come to a complete stop at appropriate points and make rash, aggressive decisions on the road.

Why it All Matters

Handling claims is expensive, so insurance companies prefer offering coverage to clients who will prove less risk to them. When a car insurance company determines someone has a low credit score, they automatically assume this person will be filing more claims and that it will cost more to insure them. This ultimately leads to a higher premium being charged.

Of course, there are always outliers in every study—for example, those with terrible credit who are great drivers. However, these trends have proven to be extremely accurate and predictive, to the point that insurance companies seriously consider them when deciding whether to offer someone coverage, how much they can offer them and for what price.

If someone maintains a clean driving record over time, it’s possible the car insurance company will lower their premium regardless of the original calculation. However, consider the proven correlation between financial behavior and insurance rates before you need to sign up. Managing credit responsibly has many more life rewards than just lower car insurance rates, so you might as well allow yourself the opportunity to experience them all.

 

Paul Martin, CPCU, is an insurance professional for Trusted Choice with over 30 years’ experience in the field. Throughout his career, his mission has been to advance the insurance industry through education to be better equipped to serve the public.

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