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How Does Your Credit Score Affect Auto Insurance Rates?

 Getting car insurance is a tricky thing. There are so many factors that affect your choice and requirement for insurance and the cost of it. It is well known that your driving record, cost, features of the vehicle, etc directly affect the price of the insurance and its premium. But did you know that in many states, insurance companies check your credit score or FICO scores to decide the premium prices? But how does your credit score affect auto insurance rates, and why? 

To understand this, we need to understand the already established; why your driving record and other related factors affect the auto insurance rates. Vehicle insurance companies do not manage car coverage, they manage risk. Their entire business model is to reduce risk to the minimum, and hence that’s how they make money. 

So when the company gives insurance to a driver that has a great driving record, it means that the chances of the driver damaging his/her car are very low. Low chances mean low chances of the company paying for the coverage. This is why they offer low insurance and premium costs to good drivers. 

Now if there’s a driver with a poor driving record, and let’s add a sprinkle of DUI, a dash of overspeeding, and a bit of rash driving. Here, this driver represents a very high risk as he/she is more likely to damage the car and ask for coverage. Since the risk is high, the company will ask for a higher price for insurance and premium. It can be summed with; higher risk equals higher costs and lower risks equal lower costs.

But then how does credit score become a factor in deciding the insurance and premium rates? It certainly does not show your driving record. So where does the risk factor come from? 

Why Credit Score Affects Insurance Rates

While there seems to be no direct connection between credit score and car insurance, there is one thing that unites both; Risk. Both insurance rates and credit scores are calculated by managing risks. Your credit score is calculated by using five main factors: 

  • Your debt payment punctuality

  • How much you owe

  • How long you’ve been using a credit card

  • How many credit cards do you have

  • And a few other factors

So credit history is the same as your driving record but for payments. How regular a person is in paying what’s owed, or is the person financially responsible or not. This is a vital piece of information for the insurance company as it helps them calculate risk, which is already established, as what these companies do.

So people with a good or excellent credit score get lower-priced premium rates compared to people with poor credit scores. Since the companies are relying on you to pay premiums on time, your credit score tells them how well you are paying dues. But how big is this difference? 

A test done by Value Penguin found that in many cases, people with a bad credit score might have to pay as high as 61% more than people with good credit scores. Similarly, people with good credit scores save 17% on average on premium rates. These numbers are beyond substantial and you’d be losing a lot if you have a bad credit score. But doesn’t this sound a little unfair? 

It is unfair to some degree. Even if you are a great driver with an excellent driving record, your credit score might affect your insurance premium rates. This is why five states in the US; Michigan, Hawaii, Massachusetts, California, and even Washington have banned the use of credit scores as a factor in deciding the insurance premium rates. This is a great step and hopefully would be followed by many states soon.

The credit score is a factor when considering the premium price by most of the insurance companies in the US, including big names such as Geico, Farmers, USAA, Allstate, American Family, and even many local ones. From the expensive to the cheapest automobile insurance companies, credit score becomes a factor in deciding the premium rates.

Checking Credit Score 

There’s a lot of misconception regarding what happens when your credit score is pulled. Many people think that pulling your credit score affects it. This is true, but only partially. There’s a soft pull and a hard pull, both done to know your credit score but only the hard pull affects your credit score. Soft pull involves just knowing the credit score while a hard pull is done when you apply for a new credit card or a loan. Hard pull affects the credit score. 


Now That everything is clear, you do know that credit score affects auto insurance rates. Not just that, but in some cases, it increases it by more than half. There is no other way around to get rid of it. All you can do is work on your credit score, pay dues in time, try not to apply for too many credit cards and repay all the debt and improve your credit score to get great insurance premium rates. Or maybe move to the five states where your credit score does not affect your insurance premium rates.

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