For years car insurance companies have used your credit history in order to help them determine the likelihood that you will file a claim on your car insurance. According to studies like the one conducted by the industry group, the Insurance Information Institute, drivers with low credit scores tend to file 40% more insurance claims with their car insurance companies.
It is estimated that those with poor credit scores can find themselves paying anywhere between 20% and 50% more for insurance than someone with better credit.
How Much Does Bad Credit Affect Car Insurance?
No one knows for sure how bad credit affects car insurance premiums for individuals. That is because car insurance companies keep it a secret. While most experts have a guess as to how the rates are calculated and what makes them go up, car insurance companies work hard to keep their exact formula a secret.
Each car insurance company has its own separate proprietary algorithm that helps them establish your car insurance rates based on a variety of factors such as your driving history, your creditworthiness, the type of car you drive, where you live, and a host of other factors. So, does bad credit affect car insurance premiums? Unfortunately, the answer is yes.
Many people do not feel that it is fair, but insurance companies and academic studies have shown that there is a direct correlation between the likelihood that you will file a claim against your car insurance and how poor your credit score is. Those individuals with poor credit scores and a history of not paying their bills on time are often faced with higher car insurance premiums than customers with stellar credit.
How To Improve Your Credit Score
There are several steps that you should take that will allow you to improve your credit score. First, you should purchase your FICO Score which is the only credit score that matters.
It is the credit score that over 90% of lenders and insurance companies use when determining your credit history and the likelihood of your repayment. It is the only one that you should concern yourself with, and it is the one that you should address if there are issues with your credit report and credit score.
Once you have your credit score, you should pull your credit report to ensure that there are no errors in it. Recent studies have shown that almost 70% of all credit reports have some type of errors on them. Fixing them can lead to a quick boost in your credit score and can potentially lower your car insurance premiums.
Your Credit Score Is Better, Now What?
If you are monitoring your credit score and it is improving, now is the time to contact your insurance company. Many car insurance companies offer discounts for good credit.
I called mine to verify that I was receiving the proper discount on my car insurance with my insurance company, and I was told that it was factored into my rate automatically each time my policy is renewed, every six months for me.
So, you should call your insurance company for a new premium rate if you have received an increase in your credit score lately. If your company will not adjust your rate or wants you to wait six months, consider shopping around for better rates thanks to your increased credit score with another car insurance company. Greenslips.com.au is a resource for people seeking information about purchasing a green slip.
You work hard to have a good credit score. You should be rewarded for that great score with a lower car insurance premium. Be sure to ask your car insurance company for a discount or maybe now is the time to look for a new car insurance company that will give you the great rate you deserve on your car insurance premium for your good credit.
I don’t think we have this here in Canada. There are flat rates. Mind you we have a government run program. It might be this way if we were privatized.
There is nothing I can do to improve my credit score. Ten years ago I had a health collapse, spend monbths in hospital, and then was unable to work for a year. In that time, all my open accounts were closed and charged off. (As I went from a low-wage job to no income, I had no savings with which to make payments once my income disappeared.)
Two creditors eventually sued me and won judgments. In the meantime, the other debts have been sold and resold to debt scavengers who reage the accounts so that they never drop off my credit report.
As I now live on a poverty-level income with no job prospects in sight, I don’t see how I can ever improve my credit score, since I lack sufficient income to resolve the debts. Other than the above, I have had no other credit activity in the past ten years, so while the old stuff doesn’t drop off, nothing else is added.
Hello,
Thanks for the nice overview on the impact of credit on car insurance Hank. Credit scores definitely have a big impact on car insurance premiums. Another area credit scores will hurt consumers is many companies will require a larger down payment when signing up for a 6 month policy, where someone with good credit will usually only be required to pay the first months installment for the down payment.
A good thing to keep in mind is that car insurance is regulated by state governments. Each state will have different rules companies most follow and there can be differences as to how your credit score is used. In Oregon credit score can only be used when a consumer shops for a new policy, where an existing customer can’t have there premiums impacted by credit scoring. California is monitored by Prop 103 and credit scoring is not listed as a primary factor in determining.
A quick way to find out the rules in the state you live is check out your states insurance and they should list the main areas impacting pricing.
Tom
So given the nature of what I do I meet with underwriters on a regular basis and can say that your credit score does affect things quite a bit, but it isn’t linear. Going from 780 to 800 likely won’t do anything, but 580 to 600 would, because based on mountains of data it might move you slightly on default risk and push required premium down a bit.
There are some insurance firms which do no use your credit score such as the Cure. Some states are beginning to regulate insurance firms to not use credit scores. California and Hawaii are two of them. In the future I am sure other states will follow.