Why does your credit score affect your car insurance premiums?
Depending on where you live, your credit score can have a huge impact on your car insurance premiums, or it may not count at all. Here's why that is and what you can do about it.
How do auto insurance rates affect your car insurance premium?
A low credit score can raise your car insurance premiums anywhere from 0% to over 200%. Some states allow insurance companies to use your credit score to determine your rate at their discretion. Some set limits on how much your credit score can count toward rating. And some completely ban the use of credit scores.
What's the reasoning behind auto insurance companies using credit scores?
Car insurance companies use probability equations to try to figure out how likely it is that you'll be in an accident and file a claim. They look through troves of data and see what drivers filing past claims all had in common.
The reason low credit scores can increase insurance rates is that those drivers are a financial risk. They not have a lot of cash on hand, and therefor might not be willing or able to pay small claims out-of-pocket. A driver with a lot of cash will often pay small claims out-of-pocket to avoid having an insurance claim on their record. A driver with financial difficulties will likely file small auto insurance claims to get their car fixed. More claims mean greater risk to the insurance company — and a higher premium.
How do you save on car insurance if you have bad credit?
If you believe your car insurance rates are high because of your credit score, the first thing you should do is shop around. Some insurance companies weight your credit more heavily than others, so switching to one that doesn't count your credit as much could give you a lower premium.
Next, work on your credit. If you can lower your credit card utilization and take care of late accounts, your credit score will start to go up. Once your credit score goes up, you can request new car insurance quotes to see if you can switch to cheaper coverage. In most places, you can get a full refund for the remaining amount on your car insurance policy, so you don't even have to wait until it's renewal time to make a switch.