Most insurance companies have decided that people who have trouble paying their bills are more likely to have car accidents and file insurance claims. In other words, anyone with a bad credit history constitutes a higher risk.

As a result, insurers charge customers with poor credit higher auto insurance premiums. (Homeowners insurance rates can be affected, too.) But what if you pay off some debt or otherwise improve your credit record? Will you get cheaper car insurance?

The short answer is yes. But don't count on your insurance company to take note and automatically adjust your rate.

"They normally cannot rerun it automatically and make adjustments to your rates," says John Parsons II, vice president of the Professional Insurance Agents of New York. "None of the companies we've got will rerun it after they've got the policy."

So, what to do?

How do I know if my insurer has checked my credit?
Every state except Hawaii, California, and Massachusetts allows insurance companies to consider a new customer's credit history, and nearly every insurer takes advantage of this option. By considering credit, the companies say, they can more accurately price risk, which allows them to offer more competitive prices to good customers.

Independent studies have shown that a strong correlation exists between credit history and claims rates. In other words, credit records help insurers predict the likelihood that a customer will cost them money.

In response to critics of the practice, insurance companies often argue that they don't actually use a driver's "credit score." But this claim is largely a matter of semantics. While it's true that insurers don't use a "credit score" from a credit bureau, they do rely on the same underlying data from those companies to create what they call an "insurance score."

Bottom line: If you're buying a new policy, the insurance company is more than likely checking your credit.

So what exactly is an insurance score?
Insurance scores don't consider income, but rather how risky your credit performance is. Do you use more than, say, half or three-quarters of your allowable limit? Do you pay your bills on time? Have you gone into default? The answers to these questions can have a profound impact on your rate.

"It's not always the amount of debt, it's whether you're paying for it," says Glenn Tippy, president of the Professional Insurance Agents of New Jersey. "It clearly has a significant impact. I wouldn't be surprised if you told me that between the best and the worst credit scores there was a 50 percent difference (in rates)."

In fact, they increase about 66% nationwide, according to data gathered for by Quadrant Information Services. But that's an average that masks big differences not only between states but between companies as well.

For example, the impact of a poor insurance score in Rhode Island averages about 49% -- that is, a driver with a poor score would see quotes 49% higher than the same driver with a good score.

The difference between companies is even more dramatic. In Bristol, R.I., among the six companies surveyed by Quadrant, one raised rates on drivers with poor credit by 29%, while another raised rates by 125%.

How do I know if my credit is negatively affecting my auto insurance rate?
Insurance companies don't have to reveal your insurance score. How they calculate the scores is considered a trade secret, as it's used to competitively price their product.

That leaves it up to you to check your performance in each of the areas they're likely to consider, including:

  1. Whether you've borrowed close to, or more than, your limit
  2. How long you've been able to keep your credit accounts open
  3. Whether you've opened a lot of new accounts recently
  4. Whether you've paid bills regularly and avoided default

If your auto insurance rates are already tanked by poor driving or claims history, then a lousy insurance score might not make that much difference. For an otherwise good driver, though, recent hard times on the credit front could spell significantly higher rates.

Under the Fair Credit Reporting Act, you must be notified if information contained in your credit history is used to charge you higher rates. This is known as an "adverse action notice."

What happens when I improve my credit score?
If you've paid debt down and boosted your credit score, then your insurance score has likely risen, too.

Once again, though, the insurer won't fill you in on the details, even though it affects your rates. Furthermore, the insurance company may not even know. Pulling credit data costs money. Insurers are unlikely to calculate a new score for you at every policy renewal, and certainly not in the middle of a term. In some states, in order to protect consumers from potential price hikes, insurers are prohibited from running these checks too frequently.

"Usually your credit gets pulled when you applied," says Penny Gusner, a consumer analyst for After that, "it depends on the company's internal rule. Some will do it once a year. Some will go two or three without pulling it."

So how do I get a better car insurance rate?
Gusner suggests calling your current insurer. Will they pull your credit and offer a better rate? Companies often confer benefits to long-term customers.

Nonetheless, the best price cut may well require some shopping, either by comparing car insurance quotes online or visiting an independent agent, particularly if bad credit forced you into the nonstandard market.

"If you shop around you might end back up with a standard company and it might have more perks than a nonstandard one," Gusner says.

Parsons estimates consumers could see savings of at least 15%.

"My guess is that most times they're better off seeking some alternatives," he says. "Insurers all come up with their own ratings system."

How can you track your credit?
Credit-based insurance scores use the same underlying data as your other credit scores.

In general, says Loryll Nicolaisen, managing editor of, a site that offers credit management advice and free credit scores, positive changes in your credit report will be reflected in the scores derived from it.

"Don't worry about your auto insurance score by itself," Nicolaisen says. "There's no way to know exactly how your insurance company weighs each factor. But we do know what affects credit scores overall."

Someone with a good driving record but poor credit has a lot to gain, says Managing Editor Des Toups. "The sweet spot for insurance is the preferred market. That means no claims, no tickets, over 25 and a solid credit history."

This article originally appeared on

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