How Your Credit Score Affects Car Insurance Rates

Most people know that a good credit score helps them qualify for better loan terms and credit card offers. But did you know that your credit score affects car insurance rates too? In most states, insurance companies use a version of your credit information to calculate your premium. A lower score can mean hundreds of dollars more per year, while a strong score can unlock meaningful discounts. In this guide, we will explain exactly how insurers use your credit, why it matters, and what steps you can take to keep your premiums as low as possible.

Why Do Car Insurance Companies Check Your Credit?

Car insurance companies are in the business of predicting risk. They want to know how likely you are to file a claim and how much that claim might cost them. Research has shown a statistical correlation between a person’s credit behavior and the likelihood of filing an insurance claim. Insurers use this data to create what is called a credit-based insurance score.

A credit-based insurance score is not the same as your FICO score or VantageScore, though it draws on similar information from your credit report. Each insurance company has its own proprietary scoring model, which means your score may vary from one insurer to the next. However, the underlying factors are generally consistent.

How Exactly Does Your Credit Score Affect Car Insurance Rates?

When you apply for car insurance or renew your policy, the insurer may pull your credit information (usually a soft inquiry that does not hurt your score). They feed that data into their pricing model, and the result directly influences your premium. Here is how the key credit factors play into insurance pricing:

Payment history: Late payments, collections, and bankruptcies signal higher risk to insurers and can raise your premium significantly.
Outstanding debt: High balances relative to your credit limits suggest financial stress, which insurers associate with higher claim risk.
Length of credit history: A longer, well-managed credit history generally works in your favor.
Credit mix: Having a healthy mix of credit types (credit cards, installment loans, etc.) can positively influence your insurance score.
New credit inquiries: Multiple recent applications for new credit can be a negative signal.

The impact can be substantial. According to industry studies, drivers with poor credit can pay 50% to 100% more for car insurance compared to drivers with excellent credit, depending on the state and insurer. For more on how credit scores work in general, see our guide on how credit scores are calculated.

Which States Restrict Credit-Based Insurance Scores?

Not every state allows insurers to use your credit information when setting rates. The following states have restrictions or bans on using credit scores for auto insurance pricing:

California: Prohibits the use of credit information for auto insurance rating.
Hawaii: Does not allow credit to be used in insurance scoring.
Massachusetts: Bans the use of credit information for auto insurance.
Michigan: Restricts how credit can be used in insurance pricing.
Oregon: Limits the use of credit information in initial policy ratings.
Utah: Has specific restrictions on credit-based insurance scoring.

If you live in one of these states, your credit score will not directly affect your car insurance rates. However, in the majority of states, credit-based insurance scoring is legal and widely practiced.

How Much More Will Bad Credit Cost You?

The exact premium increase depends on the insurer, your state, your driving record, and other rating factors. However, here is a general breakdown of how credit tiers can affect annual premiums:

Excellent credit (750+): You are likely to receive the best available rates from most insurers.
Good credit (700-749): Slightly higher than the best rates, but still competitive.
Fair credit (650-699): Expect a noticeable increase, often 10-20% more than excellent credit.
Poor credit (below 650): Premiums can be 50-100% higher or more, depending on the insurer.

Over a year, the difference between excellent and poor credit can easily amount to $500 to $1,500 or more in additional premiums. That is a significant financial incentive to maintain a healthy credit profile.

Does Shopping for Car Insurance Hurt Your Credit?

No. When an insurance company checks your credit for a quote, it is typically a soft inquiry, which does not affect your credit score at all. You can shop around with multiple insurers without worrying about damaging your credit. In fact, comparing quotes from several companies is one of the best ways to find the lowest rate, regardless of your credit score. For more details, read our article on how car loan shopping affects your credit.

How to Lower Your Car Insurance Rates by Improving Your Credit

If your credit score is dragging your insurance premiums up, the good news is that you can take action. Here are practical steps to improve your credit and potentially lower your car insurance costs:

1. Pay Every Bill on Time

Payment history is the single most important factor in your credit score, making up 35% of your FICO score. Set up automatic payments or calendar reminders to ensure you never miss a due date. Even one late payment can cause a noticeable drop in your score.

2. Reduce Your Credit Card Balances

Your credit utilization ratio, how much of your available credit you are using, accounts for about 30% of your score. Aim to keep your utilization below 30%, and ideally under 10%. Paying down high balances can produce a quick score improvement.

3. Check Your Credit Report for Errors

Errors on your credit report can unfairly lower your score. Review your reports from all three bureaus (Experian, Equifax, and TransUnion) at AnnualCreditReport.com. If you find inaccurate information, dispute the errors to have them corrected or removed.

4. Avoid Opening Unnecessary New Accounts

Each new credit application generates a hard inquiry and lowers your average account age. Only apply for new credit when you genuinely need it. This is especially important if you are planning to shop for car insurance soon.

5. Keep Old Accounts Open

The length of your credit history matters. If you have an old credit card in good standing, keep it open even if you do not use it often. Closing it can shorten your credit history and increase your utilization ratio.

Other Ways to Save on Car Insurance

While improving your credit is a powerful long-term strategy, there are other ways to lower your car insurance premiums right now:

Bundle policies: Combining your auto and home insurance with the same company often earns a discount.
Ask about discounts: Many insurers offer discounts for safe driving, low mileage, military service, good student records, and more.
Raise your deductible: A higher deductible lowers your premium, but make sure you can afford the out-of-pocket cost if you file a claim.
Shop around regularly: Rates vary significantly between insurers. Get quotes from at least three to five companies every time your policy is up for renewal.
Consider usage-based insurance: Some insurers offer programs that track your driving habits and reward safe driving with lower rates.

What If You Have No Credit History?

If you have a thin credit file or no credit history at all, insurers may not be able to generate a credit-based insurance score for you. In that case, they will rely on other rating factors such as your driving record, age, location, and vehicle type. However, building credit can still benefit you in the long run, both for insurance and for other financial goals. Check out our guide on how to start building credit from scratch for practical steps.

Frequently Asked Questions (FAQ)

1. Can an insurance company deny me coverage because of my credit score?
No. In states where credit-based insurance scoring is allowed, insurers use your credit as one factor in pricing, but they cannot deny you a policy solely because of your credit score. Other factors like your driving record and claims history carry significant weight as well.

2. How often do insurance companies check my credit?
Most insurers check your credit when you first apply for a policy and at each renewal period. Some may also check when you make changes to your coverage. These are typically soft inquiries that do not affect your credit score.

3. Will improving my credit lower my current insurance premium?
It depends on when your insurer re-evaluates your credit. Many companies review credit at renewal time. If your score has improved significantly, you may see a lower premium at your next renewal. You can also shop around with other insurers to see if your improved score qualifies you for better rates elsewhere.

4. Does filing an insurance claim affect my credit score?
No. Filing an insurance claim does not appear on your credit report and does not directly affect your credit score. However, if an unpaid claim goes to collections, that collection account could negatively impact your credit.

5. Is a credit-based insurance score the same as my FICO score?
No. A credit-based insurance score is a separate metric that uses similar data from your credit report but is calculated using a different model. Your FICO score and your insurance score may not be the same number, though the underlying credit factors are similar.