Here's How Poor Credit Affects Your Insurance Premiums

Does credit really make much of an impact?

A low credit score can impact many aspects of a person's financial life, including their ability to borrow. Unfortunately, a checkered credit history can also affect the cost of auto insurance as well.

Insurers look at a driver's credit record and use this to help assess how responsible the motorist is -- and thus how likely it is they will make an insurance claim. Because of this, credit can have a big impact on auto insurance rates.

In fact, motorists may be surprised at just how big of a role their credit plays in determining car insurance costs.

A low credit score can mean paying much more for auto insurance

According to The Ascent's data on auto insurance premiums, the national average cost of car insurance for a driver with excellent credit is $1,703. This is $943 lower than the overall national average premium of $2,646. So drivers with great credit generally end up saving a lot of money on their auto insurance bills.

Motorists with poor credit, on the other hand, pay a huge amount of added cost as a result of their credit record. In fact, the national average auto insurance premiums for poor credit drivers come to $3,622. That means a poor credit score could cost a motorist as much as $1,919 in added auto insurance costs -- more than double what a motorist with excellent credit would pay.

How to cope with high insurance costs due to poor credit

Paying a lot more money for insurance due to a poor credit score is not fun, and it may not seem fair. But drivers who don't have perfect credit may find themselves facing this fate with little recourse.

In this situation, the best thing a driver can do is to try to improve their credit as soon as possible. This can be done by using their current credit cards responsibly, aiming to keep their credit utilization (credit used versus credit available) below 30%. If a motorist owes more than this on their cards, they can pay off debt to try to improve their score and lower their insurance rates.

For those who don't currently have credit cards to help them build a positive credit history, it may be possible to qualify for a secured credit card. There's also the option of a credit builder loan to help boost your credit score. It can take time, but within a few years of responsible borrowing behavior, motorists may be able to improve their credit record enough to qualify for much lower insurance rates.

Motorists can also improve their credit more quickly by disputing inaccurate information on their reports or asking loved ones to add them as an authorized user on a credit card that has a solid payment history. This could help reduce insurance premiums even faster.

Shopping around and comparing insurance prices with different companies is also important because some auto insurance companies impose more of a penalty for imperfect credit than others. It's a good idea to get car insurance quotes from at least three insurers and ideally more to make sure you're getting the best rates -- especially with imperfect credit.