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by Kailey Hagen | Published on Oct. 16, 2021
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Is your credit score costing you money?
Insurers consider a variety of factors when setting auto insurance premiums, including a motorist's driving history, address, vehicle make and model, and surprisingly, their credit score. At first glance, your credit score might seem unrelated to your ability to drive safely, but statistics tell a different story.
Insurers look at credit scores as a measure of a driver's responsibility. The indication is that those with high credit scores manage their money well and are more likely to behave more responsibly behind the wheel. Likewise, those with lower credit scores might be less responsible drivers, and that could lead them to get into more accidents.
There is some data to back this up, including an independent study conducted by the Federal Trade Commission (FTC). It found that drivers with poor credit were more likely to file auto insurance claims than drivers with better credit scores. There are always some outliers, but this is the general trend.
Insurance companies are all about minimizing risk to themselves, so they take into account just about anything that can be considered a reliable indicator of risk, including credit scores. Poor credit raises the average annual auto insurance premium from $2,646 to $3,622 -- almost a $1,000 increase. But this varies significantly by state and insurance provider.
A handful of states -- including California, Hawaii, and Massachusetts -- have banned insurers from evaluating credit at all when setting insurance premiums. So drivers who live in one of these states won't have to worry about low credit raising their rates. But if a driver lives elsewhere, raising their credit score could save them a lot of money on insurance.
Raising your credit score requires you to take some consistent steps over an extended period of time. Try to do the following:
You can also consider taking out a secured credit card to help you build credit. These cards rarely offer rewards and they tend to have low credit limits. Some also charge annual fees. But card issuers will accept applicants with low credit and they'll report payments to the credit bureaus. As long as you pay on time, this could help your credit score, but it's important to keep your expectations in check.
It's not possible to raise your credit score overnight. Even if you do everything right, it will probably take months or even years to see a significant difference in your credit score. But that doesn't mean you have to settle for sky-high auto insurance premiums during that time.
Some insurers penalize customers for low credit more than others. Shopping around for auto insurance can help you figure out which company can offer you the best rate.
Drivers interested in proving their safe driving habits to insurers can also consider enrolling in one of the driver monitoring programs that an increasing number of auto insurers offer. These usually require a driver to install a small device in their vehicle. It monitors their driving habits and reports back to the insurer. Many companies give drivers who enroll in these programs a discount just for doing so.
It's also useful to look for a new insurance provider every policy term to see if you qualify for a better rate somewhere else. If you're serious about improving your credit and you don't have to file auto insurance claims, you should see steady progress over time.
Auto insurance is something that most people don't think about very frequently. While there are several factors that drive people to look to change auto insurance carriers, it is important to educate yourself in order to ensure you select the right coverage for you. The right coverage means not paying for coverage you don't need and not foregoing coverage that would make sense for your personal situation. While price is a major factor, we also consider other factors such as customer service and the claims process when choosing what we think are the best auto insurance providers.
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