A consumer’s credit score does not just affect their ability to get a loan or open new lines of credit, it will also affect their auto insurance rates. When applying for car insurance, insurance providers take many different factors into consideration. Auto insurance providers evaluate a consumer’s driving history, age, gender, martial status, automobile, the safety precautions they take, and their credit history.

A driver’s credit score will definitely affect the rates they receive, but why? Many drivers don’t understand why their credit score would have any bearing on their car insurance. Yet these scores matter to auto insurance providers more than many drivers would think.

How Your Credit Score Is Affecting Your Rates

When an consumer applies for an auto insurance policy, the insurance provider will evaluate their application and personal information to determine their risk level. One major thing that most insurance providers consider is the applicant’s “insurance score.” An insurance score is a number that is based on certain aspects of an individual’s credit history. This score isn’t used to determine whether an applicant is likely to pay their monthly premiums, but if they are likely to be a safe driver.

Also, it’s important for consumers to understand that their insurance score is different than their credit score. This score is derived from specific aspects of a consumer’s credit report, including:

• The age of the consumer’s accounts
• How many credit cards the individual owns
• Recent credit inquiries
• Whether a consumer pays their bills on time
• Whether a consumer has available credit or has reached their credit limits
• Liens, judgments, and past-due accounts

This information is combined, using an insurance company’s unique formula, with previous insurance claims and other data to create an applicant’s insurance score.

It is also important for consumers to understand that just because they have a good credit score, does not necessarily mean that they have a good insurance score. If a person has used more than 75% of their available credit, owns only new accounts, or has several recent credit inquiries, their insurance score may be lower than they would assume. For consumers to understand how their credit history is affecting their insurance rates, this is an important lesson to remember.

Why Do Auto Insurance Companies Consider Customers’ Credit Scores?

Many consumers believe that their credit score should have no affect on how much they pay for auto insurance. At first, many people fail to see the correlation between credit history and safe driving. Many consumer protection groups, like the Consumer Federation of America, the National Consumer Law Center, and the Center for Economic Justice are also opposed to the use of credit scores in assigning insurance rates.

Several states have tried to pass legislation that forbids insurance companies from using credit history to predict risk. Currently, Hawaii is the only state that has been successful.

However, there does seem to be a correlation between drivers’ credit scores and the probability that they will file an insurance claim in the future. The National Association of Insurance Commissioners say that numerous studies have proven this fact to be true. One study, conducted by the Insurance Information Institute, found that drivers with bad credit file almost 40% more claims than those with good credit.

It appears that auto insurance providers assume that if a person isn’t always responsible with their money, that they won’t always be a responsible driver. Many people disagree with this. But with studies to back these beliefs, insurance companies will continue to judge drivers and assign insurance rates based on credit.

Is There Any Way to Keep Your Credit from Affecting Your Rates?

There are a few different ways that drivers can keep their credit from affecting their auto insurance rates. While most insurance providers do consider credit, not every company does. Conning & Co., an insurance research company based out of Connecticut, conducted a study that reported that 92% of all insurance providers consider new applicants’ credit scores when assigning rates.

This proves that while most companies do take credit into consideration, not every company does. The only way for consumers to find out which companies won’t consider their credit score is to shop around. If a driver wants to know whether their credit score is currently affecting their insurance rates, they may ask their insurance provider. Insurance companies will not give out their exact scoring formula, but they will tell drivers if their credit history is considered.

Drivers lucky enough to live on one of the Hawaiian islands don’t have to worry about whether their credit score is affecting their insurance rates. Insurance companies are not allowed to consider this information. This means that consumers must maintain a clean driving history in order to keep their rates low.

Consumers should also understand that their credit score is not the only factor that insurance providers consider. If a driver has a clean driving record and hasn’t filed any claims in the past, their insurance score will be the factor that providers rely most heavily on. However, if a driver has points on their driving record and/or has a history of insurance claims, insurance providers will rely more on this information. Of course, this may not always be a positive thing.

How to Get the Lowest Rates Possible

Consumers have three main options when trying to find the lowest car insurance rates. The first way is to shop around. Many consumers choose an auto insurance company based on recommendations from family and friends. This can be a good thing, especially because many consumers give recommendations to others based on excellent past experiences with a company. Unfortunately, this isn’t always the best way to get the lowest rates.

If a person knows that they have bad credit, and are therefore seen as a high risk to insurance companies, they will want to compare quotes from several different companies. Drivers can use online comparison tools to make this easier if they prefer. Consumers must realize that every insurance company uses a different formula to evaluate drivers’ risk levels. One company may put a great deal of emphasis on a driver’s credit history, while another may put more emphasis on other factors.

Taking the time to compare the rates offered by different companies will ensure that drivers know exactly what rates they qualify for. Consumer Reports has found that the majority of drivers would be able to save money by shopping for a new policy. Some drivers would be able to save as much as 50%. It’s impossible for drivers to know whether they are getting the best deal unless they see what other companies are offering.

The second way that consumers can lower their rates is to improve their insurance score. While it’s impossible for consumers to see their exact insurance score, it is very possible for consumers to view their credit report. In fact, thanks to the Fair Credit Reporting Act, or FCRA, every consumer is able to obtain a free report from the three major credit bureaus, TransUnion, Experian, and Equifax, every year.

Once a consumer obtains their credit report, the first thing they will need to do is to check it for discrepancies. Consumers will need to go through each report and make sure all of the information that these reports contain is correct. While the credit bureaus are very accurate, mistakes do happen. If a consumer notices a mistake that is negatively affecting their credit score, they will want to send a letter to the credit bureau asking to have the information corrected.

Once a driver is sure that their credit reports are accurate, they need to see what they can improve. Late payments, high balances, and accounts in collections will definitely have a negative impact on one’s auto insurance rates. Consumers may want to create a budget that will allow them to begin paying off their debts, lowering their credit card balances, and of course, pay their bills on time.

Also, certain aspects of drivers’ insurance scores will improve with time. For example, it benefits drivers to have long-standing accounts. As a driver’s accounts age, their insurance score will increase. This may lower a driver’s rates, assuming that the account is kept in good standing.

A lack of credit history may also negatively affect a driver’s insurance score. If a person has a very limited credit history, they may want to work on building their history. This doesn’t mean that they have to run out and open several new credit cards. Instead, they may want to obtain a prepaid credit card or two. Too many recent credit inquiries is never a good thing.

The last way for consumers to lower their auto insurance rates is to maintain a positive driving history. Being a safe driver is certainly rewarded by insurance companies. Safe drivers file fewer claims and cost insurance companies less to insure. In return, providers offer drivers lower rates.

Taking certain safety precautions will also help lower rates. Insurance providers value things like anti-lock brakes, anti-theft systems, and prefer when customers park their car in a garage overnight. Drivers may even want to consider taking a safe or defensive driving course. These may not seem like huge things to a driver, but they will significantly lower a person’s risk in the eyes of their insurance company.

The Only Way to Receive the Most Affordable Auto Insurance Rates

The only way for drivers to get the very best auto insurance rates is to maintain a good credit score and driving history. If a person has a low credit score, even if they have a perfect driving record, they will not qualify for the most affordable rates, unless they find a company that does not consider their credit.

Conning & Co. estimates that drivers with bad credit can expect to pay anywhere from 20% to 50% more in auto insurance than those with good credit. That is how important a person’s credit history is to insurance providers.

However, while drivers are working on improving their credit, they can lower their rates by shopping around and obtaining policies with enough, but not too much coverage. Drivers may want to consider raising their deductible and reevaluating their collision coverage, at least until their credit score has improved. Drivers can also lower their rates by getting rid of extras like roadside assistance and rental reimbursement.

A consumer’s credit score will affect so many aspects of their life. While drivers may believe that they are a safe driver, unless their score reflects their responsibility, they will be penalized by auto insurance companies. Working to increase a consumer’s credit score will improve their financial situation, as well as their ability to demand the lowest auto insurance rates available.