When shopping for car insurance, you might be focused on factors like the type of coverage, deductible, and the make and model of your car. However, your credit score plays a significant role in determining your car insurance premiums. While not all states allow insurers to use credit scores in this way, in many places, it can have a major impact on how much you pay.
Understanding how your credit score affects your car insurance can help you make smarter decisions when shopping for coverage and managing your finances.
What is a Credit Score and Why Does It Matter?
A credit score is a numerical representation of your creditworthiness, which is determined by factors such as:
- Payment history (whether you pay your bills on time)
- Amount of debt you owe
- Length of your credit history
- Types of credit accounts you have
- Recent credit inquiries
Insurance companies use this score to gauge your financial responsibility, as studies have shown that individuals with higher credit scores are generally less likely to file insurance claims. Therefore, insurers see credit scores as a way to assess risk.
How Credit Scores Affect Car Insurance Premiums
1. Higher Credit Score = Lower Premiums
Generally, the higher your credit score, the lower your car insurance premiums. Insurers believe that individuals with good credit are more likely to pay their premiums on time and avoid risky driving behaviors. They are seen as less of a financial risk.
People with excellent credit (typically scores above 750) often qualify for the best rates, while those with fair or poor credit may see much higher premiums.
2. Lower Credit Score = Higher Premiums
On the other hand, individuals with a lower credit score are viewed as higher risk by insurance companies. A poor credit score suggests you may be more likely to miss payments or file claims, which translates to higher premiums. In some cases, insurance rates can be significantly higher for those with bad credit.
If your credit score falls below 600, you may face higher-than-average premiums—even if you have a clean driving record.
The Impact of Different Credit Ranges
Insurers often categorize credit scores into bands that reflect the level of risk you pose. These bands typically include:
- Excellent Credit (750 and above): These individuals usually receive the best car insurance rates.
- Good Credit (700-749): While not the lowest rates, good credit still qualifies for reasonable premiums.
- Fair Credit (650-699): Individuals in this range may see higher premiums, but there are still options available for affordable coverage.
- Poor Credit (600-649): At this level, car insurance premiums can be noticeably higher. You may need to shop around for the best rates.
- Very Poor Credit (below 600): Those with very poor credit will face the highest premiums and may struggle to find affordable options.
Why Do Insurance Companies Use Credit Scores?
Correlation Between Credit and Risk
Research has shown that there is a strong correlation between credit scores and the likelihood of filing insurance claims. People with poor credit are statistically more likely to file claims, which could be due to financial stress or risky behavior. As a result, insurers use credit scores as a predictive tool for determining the level of risk you represent.
Risk-Based Pricing
Insurance is based on the principle of risk-based pricing, where premiums are adjusted based on an individual’s risk profile. Since people with better credit are less likely to file claims, insurance companies are willing to offer them lower premiums. Conversely, those with lower credit scores are seen as more likely to cause higher costs for the insurer.
Is Using Credit Scores in Insurance Legal?
It’s important to note that not all states allow insurance companies to use credit scores when determining premiums. Currently, there are a few states (California, Hawaii, and Massachusetts) that have laws prohibiting insurers from considering credit scores.
In states where credit scores are used, there are regulations in place to ensure that insurers do not use credit as the sole factor in setting premiums. Insurers must also consider factors like your driving history, age, and location.
How to Improve Your Credit Score to Lower Insurance Premiums
If you have poor credit and are facing high insurance premiums, the good news is that you can take steps to improve your credit score. Here’s how:
1. Pay Your Bills on Time
Your payment history has a major impact on your credit score. Paying bills on time, including credit cards, loans, and utility bills, can quickly improve your score.
2. Reduce Outstanding Debt
High credit card balances and loans can negatively affect your credit score. Paying down debt and maintaining a low credit utilization ratio (below 30%) can have a positive impact.
3. Check Your Credit Report for Errors
Sometimes, your credit score is affected by errors or inaccuracies. Regularly reviewing your credit report and disputing any mistakes can help improve your score.
4. Avoid Opening Too Many New Accounts
New credit inquiries can temporarily lower your credit score. Only open new credit accounts when necessary, and avoid applying for credit cards or loans frequently.
5. Keep Old Accounts Open
The length of your credit history makes up a portion of your credit score. Keeping older accounts open (even if you don’t use them often) can help improve your credit score.
Final Thoughts
In 2025, your credit score is more important than ever, especially when it comes to car insurance premiums. A higher credit score can help you qualify for lower rates, while a poor score can result in higher premiums.
By understanding how your credit score affects your car insurance and taking steps to improve it, you can not only save money on your premiums but also boost your overall financial health.
If you are shopping for car insurance, remember to check your credit score first. It’s just one more way to ensure you get the best possible rate for the coverage you need.