Why Does Credit Score Affect Car Insurance Premiums?

When looking for auto insurance, you might have noticed the vastly different prices for different auto insurance companies and different people. Your friend might be offered the same car insurance policy for half the price that you paid in some cases. Car insurance rates vary based on multiple factors. 

We’ll look at all the other factors that affect car insurance premium rates, but only one of these factors in detail. Why does your credit score affect your auto insurance premium rates? What relevance does credit score have when it comes to your car driving? Let’s dive in. 

Risk Management in Auto Insurance

When it comes to any insurance provider, not just car insurance, the insurer is taking a big gamble. The insurance company takes the liability for your risks. In health insurance, the risk of you getting sick comes with the liability of the insurer paying for the treatment. 

When it comes to car insurance, which is the most active insurance sector, this risk management is, understandably, more aggressive and intrusive. Auto insurance companies want to leave no stone unturned to ensure they have considered every factor that might contribute to the risk of an accident. 

The better insurance companies are at assessing risk, the better they can manage it. So when someone more likely to be in a car accident buys a policy, car insurance companies charge the person more to offset the risk.

This assessment is done by looking at the person’s driving record, past insurance claims, age, gender, location, make and model of the car, and the more confusing, credit score. Car insurance companies want to make sure that the risk is always at a minimum, while the premium payment is always at the maximum. 

So where does credit score come in this equation? How do car insurance companies assess risk by credit score? Are people with poor credit scores more likely to crash their car? No. But a credit score is not considered to assess the risk of an accident, but for something else. 

Credit Score as a Factor

Remember the aim of car insurance companies? To make the risk of road accidents (and an insurance claim) minimum, while the chance of premium payments maximum. While most factors are used to assess the first component (assessing the risk), the credit score is used to assess the second part of the equation, i.e., the chance of premium payments.

Insurers need policyholders to pay their insurance premiums regularly. They incur huge losses when policyholders are unable to pay the premium. So to offset this, insurance companies treat people with poor credit scores as high-risk individuals because a person with poor credit scores is more likely to fail in premium payments.

Insurance companies therefore don’t like to have such clients, just like banks and other financial institutions consider such clients as unsuitable for loans. For example, failing to pay back your payday loan would lead to a reduction in your credit score and this would reflect poorly on the applicant. This leads to something counterintuitive; people with poor credit scores (who are struggling financially) are charged higher premium rates.

Three states have banned the use of credit scores for deciding insurance premium rates; California, Hawaii, and Massachusetts. So residents of these states don’t have to worry about poor credit scores. 

There are some other states like Alabama, Florida, Illinois, Washington, Vermont, Texas, Oklahoma, etc have taken some steps to reduce the impact of credit scores on your insurance rates. These states have stopped auto insurance companies from using the absence of a credit score as a factor in deciding insurance premium rates.

So if you do not have any credit score or record, it cannot be used as a negative factor (that increases the insurance premium rates) in these states. For people living in other states, say Wisconsin, things could be very different. 

A poor credit score along with other negative factors such as a bad driving record, past insurance claims, an expensive car, etc can skyrocket your insurance premium rates. This is why you must buy the right car insurance from the right company. 

Saving Money with a Poor Credit Score

If you are a resident of any of the states where credit score is a factor in deciding car insurance premium rates, and your credit score is poor, you need to be extra careful in choosing the right car insurance company. 

Consider a lot of factors and choose the insurer whose insurance premium rates are the least affected by credit score. Searching for the right companies specifically for your state is very important. 

For example, if you live in Wisconsin, look for the best car insurance in Wisconsin and then compare all the rates after you have provided all the details. This will help you see which company offers the lowest price for the best coverage. 

Other Factors 

Apart from credit score, some other factors that insurers consider when determining your auto insurance premium rates are:

• Your driving record 
• Past insurance claims
• Make and model of the car
• Age
• Gender
• Location

The make and model of the car make a lot of difference when it comes to saving money on auto insurance. If you are planning on getting a car and you already have a poor credit score, the best thing, in this case, would be getting a used car that’s cheaper to repair and operate. This would reduce your insurance premium rates. 

Apart from this, always make sure that you keep your driving record clean. Prevent getting tickets, points, speeding, and driving under the influence. Avoid unnecessary insurance claims, and keep your deductibles high to reduce both car insurance rates and premium rates. 

When it comes to auto insurance rates, everything depends on the risk associated with the policyholder. Want to save money on it? Reduce the risk. But always make sure you get great car insurance coverage.