Does Your Credit Score Affect Car Insurance?

Many factors influence the cost of car insurance, and in most states, your credit-based insurance score is typically one of them. To help you understand how credit information could impact your rate, we’ll go over all things credit and car insurance. We’ll even share tips to improve your credit score and discuss whether so-called “no-credit-check car insurance companies” are a good idea.

Credit Ratings vs. Credit Scores vs. Credit-Based Insurance Scores

To start, let’s define some credit-related terms and explain the differences between a credit rating, credit score, and credit-based insurance score.

What’s the Difference Detween a Credit Rating and a Credit Score?

A credit rating is a letter grade (like AAA, AA, A, BBB, and so on) given to a business or government indicating how reliable of a borrower the entity is, according to Investopedia.

Although credit scores are similar to credit ratings in that they also represent a borrower’s reliability in paying back a loan, Investopedia notes that credit scores are typically used for individuals (and sometimes small businesses). These scoring models typically use a three-digit number, with FICO scores and VantageScores being the most well-known. In relation to insurance, it’s really your credit score, not a credit rating, that would be used as one of the factors in helping set your rate.

What’s a Credit-Based Insurance Score?

A credit-based insurance score (or auto insurance score) is a rating that insurance companies use along with other applicant information to help quote you a fair price for your policy. The National Association of Insurance Commissioners (NAIC) says these insurance scores are based on pieces of someone’s credit history. However, the goal isn’t to determine the potential policyholder’s ability to repay a loan; they’re designed to predict how likely an individual is to have an insurance loss.

“Many insurers argue that the use of credit-based insurance scores is necessary to properly evaluate risk and charge individual policyholders rates that most closely align with their true risk,” reports the NAIC.

How Does a Credit Score Affect Car Insurance?

Now let’s get into how insurance scores work and how credit scores affect auto insurance rates. The Insurance Information Institute says companies might use the following information from your credit report to give you an insurance score:

• Your current debt
• Your payment history
• The length your accounts have been open, the types of accounts you have open, and the number of accounts you have open
• Bankruptcies, bills sent to collections, and late payments
• New credit applications
• Unused credit

So, while credit scores and insurance scores are not exactly the same, your credit score (or the at least the factors that determine it) plays a major role in determining your insurance score, meaning it’s important to try to keep your credit score up.

Important Note: Some states prevent (or limit insurers) from using (or how they use) your credit history to influence your premium amounts.

Credit Checks vs. No Credit Checks

As we discussed above, nearly all major auto insurance companies in most states use credit checks when determining rates. Outside of the handful of states that don’t allow credit to be a variable, “no credit check insurance” is rare. 

A poor driving record and bad credit can make it more difficult to find cheap car insurance, so it might seem like a “no credit check insurance company” is the best option. But, purchasing a policy from one of these companies doesn’t necessarily mean you’re securing a lower rate. It may be worth shopping and comparing quotes with both types of insurers to secure the best policy rate. You may find that some companies, like Direct Auto, are more willing to work with you and help you find affordable coverage, even if you don’t have the greatest credit history.

How to Raise Your Credit Score

Because auto insurance scores are largely based on your credit history, cleaning up your credit report and boosting your credit score can help you secure a lower rate on car insurance coverage. If you have a low score, or just want to raise your score by a few points, try these tips.

• Make on-time payments. Set up payment reminders on your phone's calendar or request they be sent to your email.
• Don't borrow up to your credit limit. Maxing out your accounts can hurt your score.
• Leave your credit cards in a safe place. Putting your credit cards away can help ensure you don’t make any impulsive or unnecessary purchases.
• Create and stick to a budget. Plan and track your spending to help make sure you don’t end up with a higher-than-planned credit card bill.
• Pay down your balance as quickly as possible. You can try the debt avalanche approach (paying off accounts with high interest first) or the debt snowball approach (paying off the smallest balance first).
• Don't open new accounts. This could temporarily drop your credit rating. The same goes for closing multiple accounts at once.
• Check your credit report regularly. Look at least once a year to make sure it doesn't have any errors on it. If you find errors, follow the reporting agency's instructions on how to correct them.
• Speak with a credit counselor. You’ve heard of marriage counselors, right? Well, some counselors can help you repair your relationship with money, too. Credit counselors with the nonprofit National Foundation for Credit Counseling work with consumers to review their finances and come up with solutions for issues surrounding credit card debt, loan debt, housing expenses, money management, and other financial matters.
• Contact your creditors if you're having trouble making your payments. They may be able to offer you different payment options.

How to Get Your Credit Score

You can get your credit report for free each year by visiting AnnualCreditReport.com. Knowing what your credit looks like can help you keep track of your score and keep up with outstanding accounts or marks on your report.

Car Insurance for Bad Credit, Great Credit, and Everything in Between

Some companies are unwilling to work with drivers who have a poor credit history. But at Direct Auto, we’re here to help you find affordable car insurance whether you have a perfect credit score or no credit history at all. For more information, or to get a free car insurance quote, visit one of our locations, get a free quote online, or call us at 1-877-GO-DIRECT.