Your credit score plays an important role in your financial life. This one number can determine your interest rates, loan approval or even where you live. One thing you might not know is, in many cases, your credit score can affect your car insurance rates.
Say what?! You may wonder what exactly your credit score has to do with your car insurance rates. Read on to learn about the surprising link between your credit score and the cost of insurance, and how to score cheaper car insurance rates no matter where you stand.
How your credit score may impact your car insurance rates
Your credit score is used to illustrate your creditworthiness. It shows a prospective lender how likely you are to pay your bills on time, manage debt and more. But what does paying debt on time have to do with car insurance? What does your creditworthiness have to do with your history as a driver?
Not only that, but it’s not talked about very often. Many car insurance companies are hush-hush about the process.
“It is certainly controversial, but almost every insurance company in the U.S. factors an individual’s credit score into the rate they will pay for auto insurance,” says Joel Ohman, Certified Financial Planner and founder of the website Car Insurance Comparison. “Technically, the insurance company may not necessarily pull a credit score or credit report, but they will use some type of insurance score that is based on one’s credit score. Generally speaking, the better your credit score, the better your car insurance rate.”
Insurance companies take data from your FICO credit score and create their own auto credit score. Your auto insurance credit score may reflect a variety of factors including your payment history, credit utilization, number of accounts and more. Using this proprietary auto credit score, car insurers aim to predict how likely it is that you will file a claim.
According to data from Consumer Reports, your car insurance premiums can be higher if you have a lower credit score.
What this means for your wallet
The Secret Score Behind Your Rates published by Consumer Reports states, “Our single drivers who had merely good scores paid $68 to $526 more per year, on average, than similar drivers with the best scores, depending on the state they called home.”
That is the difference between having a good credit score and the best scores. For people with poor credit scores, the damage could be much worse. According to Consumer Reports data, a poor credit score could result in an additional $1,301 to their car insurance premium.
In other words, your credit score could be costing you more in car insurance — even without a moving violation, accident or anything else.
This auto credit score model is somewhat controversial, though it’s standard when it comes to car insurance companies. It’s also legal in most states — except California, Massachusetts, and Hawaii. Car insurers feel it is an accurate way to predict the likelihood of a future claim.
According to the Esurance website, “…research shows that credit scores can accurately predict accident potential. Statistical analysis shows that those with higher credit scores tend to get into fewer accidents and cost insurance companies less than their lower-scoring counterparts.”
It’s important to note that your credit score is merely one factor out of many that can contribute to your insurance premium. Where you live and your driving record will also affect your car insurance premium.
How you can qualify for cheaper car insurance
If your credit is less than stellar, you could be paying more in car insurance premiums without even realizing it. In order to get cheaper car insurance, check your credit report. Your credit report can inform your credit score, which also affects your unique auto insurance credit score.
You can check your credit report for free at AnnualCreditReport.com. If you see any errors, dispute them and make sure they are resolved quickly. Make your payments on time and improve your credit. Sign up for autopay or text alerts for bills you have missed payments for in the past. Keep your balances low and be mindful of opening new credit accounts.
Finally, don’t be afraid to shop around to find the best car insurance rates. Some companies may offer better deals than others, so it’s always a good idea to do a check up and get a quote on other options. This is especially true if you have a bad driving record or poor credit.
“Certain auto insurance companies specialize in higher risk drivers. This means that if one has a DUI in their history, many accidents, or even poor credit, then it becomes all the more important to shop around and compare rates from many different car insurance companies,” says Ohman.
It may seem unfair to use something like your credit score to determine your car insurance premiums. However, it’s a pretty standard model car insurers use. To qualify for cheaper car insurance, stay on top of your credit and know the impact it can have on your premiums. Make your payments on time and keep your balances low so you have a strong auto insurance credit score and improve your chances of getting an affordable rate.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|