How bad credit affects car insurance rates
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A bad credit history makes it difficult to get a car loan or car lease, and it also makes it difficult to get car insurance. Some auto insurance companies will increase your auto insurance rate if you have bad credit, while others are more lenient with those with bad credit, similar to how credit card companies treat consumers with bad credit. Credit scores affect auto loans, credit cards, mortgages, and even employment.
| FICO credit score | |
|---|---|
| Account | Rating |
| 760 – 850 | Perfectly |
| 700 – 759 | Very good |
| 723 | Average FICO score |
| 660 – 699 | Well |
| 687 | Average FICO score |
| 620 – 659 | Not good |
| 580 – 619 | Not really |
| 500 – 579 | Very bad |
Track your consumer credit or FICO scores through a website like Credit Karma or WisePiggy. They offer a free way to see the score calculated by the credit bureau, as well as the credit reports it's based on.
How Insurance Companies Use Your Credit Score
Most insurance companies consider credit history a key factor in setting car and home insurance rates. All states except California, Massachusetts and Hawaii allow insurers to check credit history. Insurance companies use the logic that people who pay their bills on time charge less and are cheaper than those who make late payments.
However, insurance companies do not take into account the same credit score as lenders - they use a rating created specifically for them. The credit score used by lenders predicts your ability to repay a loan, while the credit insurance score predicts whether you will file a claim.
Bad credit history can significantly increase car insurance rates.
In the 47 states where your credit score can affect the cost of car insurance, the consequences 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 bad credit.
| Average difference in insurance rates based on credit rating | |||
|---|---|---|---|
| Insurance company | Excellent credit insurance rate | Average credit insurance rate | Bad credit insurance rate |
| State farm | $563 | $755 | $1,277 |
| Allstate | $948 | $1,078 | $1,318 |
The average difference in rates between good and satisfactory creditworthiness was 17% in the US. The difference between good and bad creditworthiness was 67%.
Your credit score may even affect the down payment the insurance company requires and the payment options available to you.
How Bankruptcy Affects Auto Insurance Rates
Declaring bankruptcy can affect your insurance, but how much depends on the credit score you had before the bankruptcy. If you have insurance and continue to make regular payments, you are unlikely to see a rate increase when your insurance is renewed, although some companies will check your credit history once a year. As with a lower credit score, bankruptcy can lead to higher rates.
Bankruptcy will always hurt your credit score and will remain in your history for up to 10 years. During these years, car insurance companies that use credit as part of their risk assessment may increase your rate or may refuse to offer you the lowest rates available. If you are buying a new policy after bankruptcy, you may find that some companies will not offer you a quote.
Factors Affecting Your Car Insurance Estimate
Insurance companies say the most important factors for a good credit-based insurance score are a long credit history, minimal late payments or delinquent accounts, and open credit accounts in good standing.
Typical disadvantages include late payments, fees, high debt levels, a high number of loan inquiries, and a short credit history. Your income, age, ethnicity, address, gender, and marital status do not count towards your points.
The use of credit to set premiums is controversial. Some consumer advocates say it unfairly penalizes low-income people or those who have lost their jobs — the people who need cheap car insurance the most. But insurers say that, combined with other rating factors, using credit insurance scores helps them set accurate and appropriate rates.
Techniques for improving auto insurance valuation
To improve your credit-based insurance score and get lower premiums, be sure to pay your bills on time and keep all your bills in good condition. Late payments and fees will hurt you. Set and save credit. The longer you maintain a decent credit history, the better.
No or little credit history will lower your score. Do not open unnecessary credit accounts. Too many new accounts signal problems. Open only those credit accounts that you really need. Keep your credit card balance low. The insurance score takes into account the amount you owe in relation to your credit limits. Avoid maximizing your credit cards. Make sure your credit report is accurate. An error can damage your account. 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 your finances going. You can find free or low-cost help through the nonprofit National Credit Counseling Foundation.
Your auto insurance rates will likely go down as your credit score improves. Compare auto insurance quotes at the time of renewal if you notice a positive trend in your estimates.
Sources of
How much does bad credit increase your rates?
Does Bankruptcy Affect Auto Insurance Rates?
What Helps and Hurts Your Auto Insurance
How to improve your auto insurance score
This article has been adapted with the approval of carinsurance.com: http://www.insurance.com/auto-insurance/saving-money/car-insurance-for-bad-credit.html.
