How Bad Credit Affects Your Car Insurance Rate

Having bad credit makes it difficult to get a car loan or lease a car - it can also make it more difficult to get car insurance. Some car insurance companies will increase your car insurance rate if you have bad credit, while others are more forgiving to those with bad credit, similar to how credit card companies are for consumers with bad credit. Credit scores affect car loans, credit cards, mortgages, and even employment.

FICO Credit Score Ratings
Score Rating
760 - 850 Excellent
700 - 759 Very good
723 Median FICO score
660 - 699 Good
687 Average FICO score
620 - 659 Not good
580 - 619 Poor
500 - 579 Very poor

Monitor your consumer credit or FICO scores through a site such as Credit Karma or WisePiggy. They offer a free way to see a score calculated by credit bureaus as well as the credit reports on which it is based.

How car insurance companies use your credit score

The majority of insurance companies consider credit history a key factor when setting car and home insurance rates. Every state except for California, Massachusetts, and Hawaii let insurers check credit history. Insurance companies use the logic that people who pay bills on time file fewer and cheaper claims than those who make late payments.

However, insurance companies don't consider the same credit score that lenders do - they use a score that’s created specifically for them. The credit score used by lenders predicts your ability to repay a loan whereas a credit-based insurance score predicts whether you'll file claims.

Bad credit can substantially increase car insurance rates

In the 47 states in which your credit score can influence your car insurance quote, the impact of bad credit can be severe. Insurance.com commissioned Quadrant Information Services to compare full-coverage rates for drivers with average or better credit, fair credit, and poor credit.

Average Difference in Insurance Rates Based on Credit Score
Insurance Company Excellent Credit Insurance Rate Average Credit Insurance Rate Poor Credit Insurance Rate
State Farm $563 $755 $1,277
Allstate $948 $1,078 $1,318

The average difference in rates between good credit and fair was 17% across the U.S. The difference between good credit and poor credit was 67%.

Your credit score could even affect the size of the down payment an insurance company requires and which payment options are available to you.

How bankruptcy affects your car insurance rates

Declaring bankruptcy can affect your insurance, but how much depends on the credit score you had before bankruptcy. If you have insurance and continue making regular payments, you're less likely to see a rate increase when your insurance comes up for renewal, although some companies will check your credit once a year. As with a lower credit rating, bankruptcy may lead to a rate increase.

Bankruptcy is always going to hurt your credit rating and will remain on your record for up to 10 years. During those years, car insurance companies that use credit as part of their risk assessment may increase your rate or may decline to offer you the lowest rates available. If you're shopping for a new policy post-bankruptcy, you may find that some companies will not offer you a quote.

Factors that impact your car insurance score

Insurance companies say the most important factors for a good credit-based insurance score are a long credit history, minimal late payments or past-due accounts, and open credit accounts in good standing.

Typical negatives include past-due payments, collections, a high debt level, a high number of credit inquiries and a short credit history. Your income, age, ethnicity, address, gender and marital status are not considered as part of the score.

The use of credit for setting premiums is controversial. Some consumer advocates say it unfairly penalizes people with low incomes or those who have job losses – the people who need cheap car insurance the most. But insurers say when combined with other rating factors, the use of credit-based insurance scores helps them set accurate and appropriate rates.

Methods for improving your car insurance score

To improve your credit-based insurance score and get lower premiums, be sure to pay your bills on time and keep all your accounts in good standing. Late payments and collections will hurt you. Establish and maintain credit. The longer you maintain a decent credit history, the better.

Having no or little credit history will lower your score. Don't open unnecessary credit accounts. Too many new accounts signals trouble. Only open the credit accounts you really need.Keep your credit card balances low. The insurance score considers the amount you owe in relation to your credit limits. Avoid maxing out your credit cards. Make sure your credit report is accurate. A mistake could harm your score. You can request free copies of your credit reports from the three national credit reporting agencies through AnnualCreditReport.com.

It’s a good idea to get financial advice from a professional if you need help figuring out how to keep on top of your finances. You can find free or low-cost help through the nonprofit National Foundation for Credit Counseling.

Your car insurance rates will probably go down as your credit scores improve. Compare car insurance quotes at renewal time if you have seen a positive trend in your scores.

Sources

This article is adapted with approval from carinsurance.com: http://www.insurance.com/auto-insurance/saving-money/car-insurance-for-bad-credit.html.


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