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How Your Credit Score Affects Your Insurance Rates

Sunday, April 30, 2023

Your credit score doesn’t just impact your ability to get a new credit card or loan – your credit score affects your insurance rates too! Why is your credit score important for insurance? Just how important is it? And how can you improve your credit to lower your rates? In this article, we’ll answer all of the above. 

A man points at an overlay depicting the credit score's connection to various insurance rates.

Does Your Credit Score Affect Your Insurance Rates?

Yes, your credit score – a numerical representation of your creditworthiness – can affect your insurance rates. In fact, credit score can be one of the most significant factors that insurance companies use to determine your insurance score – a measure of your risk to the insurance company. The higher your insurance score, the lower your insurance rates are likely to be. The lower your insurance score, the higher your insurance rates are likely to be.

Interestingly, insurance companies in some states cannot use a credit-based insurance score. California, Hawaii, Massachusetts, and Michigan don’t allow the use of credit scores in determining insurance rates. Other states have restrictions on how insurance companies can use credit scores. For example, in some states, insurance companies can only use credit scores to determine new policy rates and not for renewals. In others, credit can affect homeowners’ policies but not auto insurance policies. 

What Is Your Insurance Score Based On?

Your insurance score is based on a variety of factors other than your credit score. For car insurance, they’ll look at your claims history, driving record, age, gender, and where you live. Insurance companies use a formula that weighs these factors differently to come up with your insurance score.

Do Insurance Companies Run Your Credit for a Quote?

In states where it’s allowed, yes, insurance companies will typically run your credit for a quote. When you request a quote, the insurance company will ask for some of your personal information, including your name, address, and social security number. They will use this information to run a credit check, which will help them determine your insurance score and your insurance rates.

Does Credit Score Affect Car Insurance?

Yes, your credit score can affect your car insurance rates. Depending on your state, the insurance company may run a credit check to determine your insurance score, which is used in turn to set your rates. 

A low score often leads to higher rates. In fact, according to a 2023 NerdWallet study, a poor credit score can lead to higher insurance rates than a DUI. The same study found that drivers with bad credit have a 61% higher car insurance rate than drivers with good credit. 

Why Does Credit Affect Car Insurance?

Studies have shown that there is a correlation between credit score and the likelihood of filing a claim. It’s reported that people with higher credit scores are less likely to file a claim than people with lower credit scores. An insurance company considers you to be a riskier candidate for their insurance if you have a low credit score or lack a credit history. If they think that you are more likely to file a claim, they’ll adjust the price higher accordingly. 

Why Do Insurance Companies Look at Credit Reports?

Insurance companies look at credit reports to help them determine your insurance score, which helps them set your insurance rate and premium. They also use credit reports to verify your identity, to ensure that you have a good history of paying bills on time, and to see if you have any outstanding debts or judgments against you (which can be a sign of financial instability).

Can Your Insurance Cost Go Higher If Your Credit Score Is Low?

Yes, in most states, your insurance costs can be higher if your credit score is low. In some cases, the difference in insurance rates can be significant.

What Is a Good Credit Score for Insurance?

A good credit score for insurance is considered to be between 670 and 739, according to the FICO scoring model. The same model shows “very good” credit to be between 740 and 799 and “excellent credit” to be between 800 and 850. However, the ideal insurance score can differ between insurance companies. Some insurance companies may consider a score of 650 or higher to be good, while others may require a score of 750 or higher.

A person hands over their credit card.

How to Improve Your Credit Score and Lower Your Insurance Rates

Improving your credit score can help you lower your insurance rates. Here are a few tips for improving your score:

  • Pay your bills on time. Late payments can hurt your credit score. Make sure to pay your bills on time every month.
  • Keep your credit utilization low. Your credit utilization is the amount of credit you are using compared to your credit limit. Keep your credit utilization below 30% to improve your credit score.
  • Monitor your credit report. Check your credit report regularly to make sure there are no errors or fraudulent accounts on your report.
  • Don’t open too many new accounts. Opening too many new accounts can lower your credit score. Only open new accounts when necessary.
  • Keep old accounts open. Closing old accounts can lower your credit score because it shortens your credit history. Keep your old accounts open and use them occasionally to keep them active.

Don’t forget that while your credit score can have a significant impact on your insurance rates, it isn’t the only factor! Always shop around for policies to find the one that works for you. At Independent Insurance Associates, we are able to work closely with our partners to find you the best rate possible. Get a free quote online, or give us a call! We can’t wait to work with you!