Car insurance companies often rely on what’s called a “credit-based insurance score” when setting your car insurance rates. Credit-based insurance scores give different weights to different factors than a typical credit score, such as a FICO score.
Insurers often cite a Federal Trade Commission study that correlates credit with the risk of a driver filing an auto insurance claim. Insurers who use credit-based insurance scores claim that the higher your score, the less likely you are to file a claim, which usually means you’ll get better car insurance rates for having good credit. .
Are there auto insurance companies that don’t care about credit?
Unless an insurer specifically states that they don’t use credit-based insurance scores as a rating factor, it’s best to assume they all do if your state allows this practice. There are only four states – California, Hawaii, Massachusetts and Michigan – that prohibit the use of credit scores to help determine car insurance costs.
Some other states limit how insurance companies can use credit scores.
For example, Maryland prohibits car insurance companies from using credit history to determine whether they will insure you, renew your policy, increase your costs, or cancel your policy. But Maryland laws allow for a credit check when you first apply for a policy, which helps determine what you’ll pay when your policy begins.
Some state laws require auto insurance companies to disclose that your credit report may be reviewed and notify you if doing so results in adverse action, such as increased costs.
How does credit score affect insurance premiums?
Drivers with bad credit saw an average rate increase of 79%, according to a Forbes Advisor analysis of rate increases and bad credit. This translates to an increase of more than $1,560 per year on average.
Some states have done studies to look at the impact of using credit scores on car insurance costs and found that most drivers end up paying less for car insurance.
For example, two-thirds (66%) of policyholders had lower auto insurance costs with a credit score in underwriting, according to a 2016 study by the Vermont Department of Financial Regulation. Only 16% saw higher rates and 18% saw no difference. A similar study by the Arkansas Department of Insurance found that more than half (57%) of policyholders saw a decrease in auto insurance costs, 23% saw an increase in costs, and 19% did not. found no change.