How Your Credit Score Affects Your Car Insurance Rate

Are you wondering about what your credit score has to do with how much premium you’ll pay for your car insurance?

Do you need to apply for a new car insurance policy?

Do you have a pretty stellar credit score?

If yes, you are more likely to get lower car insurance rates. And if not, you may want to work on building good credit.

Let’s take a look at how your credit score can affect your car insurance rate.

What is a credit score and why does it matter?

Your credit score usually refers to a three-digit number reflecting your creditworthiness.

Also known as FICO scores (named after Fair Isaac Corporation, the inventor), it ranges from 300 to 850, 300 being the lowest and 850, the highest.

These numbers show a pretty good picture of your financial history and behavior to lenders and insurance companies.

Your credit score matters to them because they will use it to gauge if you can manage to pay your bills and loans on time.

A higher number lets them know that you are a borrower who comes with less risks and can result in a higher chance of approval. You also get to enjoy lower rates and more flexible terms.

Why do car insurance companies care about your credit score?

Car insurance companies won’t just look at your regular credit score. What they do is analyze key aspects of your credit history so that they can come up with a credit-based insurance score. This credit-based insurance score is weighted differently than your regular credit rating.

Insurance companies only care about the information that relates to risks and potential car insurance losses. Their aim is to determine the risk, just like other lenders and financial institutions, but they don’t care about your location and income.

There are agencies like FICO, LexisNexis, and TransUnion who calculate credit-based insurance scores. They look for the following:

  • Your history of payments (includes late payments and delinquencies)
  • Credit history length
  • All your credit account numbers and types like loans and credit cardsOn-going and outstanding debt
  • How and where you utilized your credit
  • New applications for credit

How do insurance-based credit scores affect car insurance rates?

Having a really low credit score can cost you thousands of dollars in car insurance rates. If you have a low credit score it is recommended that you raise your credit score at least a hundred points or more so you could possibly save up to around $1,000 a year on your car insurance premiums.

The amount of money you can save varies, however, depending on your current score and insurance provider.

Each insurer has their own algorithms to calculate rates so it’s also best to gather information from different providers.

Remember though, if you have a low score, you’ll more likely end up paying a higher premium as you appear to have a higher insurance risk.

It’s best to avoid having extremely low credit scores and aim for a fair to good score so that you’ll enjoy the benefits of paying lower car insurance rates.

The added benefit of raising your credit score is that other companies will want to do business with you and offer you lower prices, too. So it’s an all around win for you.

Start building your credit score today for lower rates on car insurance, loans, credit cards, and more.