How Credit Scores and Car Insurance Are Connected
You probably know your credit score affects your ability to get a mortgage or a loan. But did you know it also affects your car insurance rate? In most states, insurance companies use credit-based insurance scores to determine what you pay. A lower credit score can cost you hundreds (or thousands) extra per year on auto insurance.
The connection between credit and insurance rates frustrates many people, but it's legal and common. Understanding how it works and what you can do about it can help you lower your premiums.
Does Credit Actually Affect Car Insurance?
Yes. In 48 states, car insurance companies are allowed to use credit scores when setting rates. Insurers have found a correlation between credit history and insurance claims—people with lower credit scores file more claims on average.
Insurance companies don't use your FICO credit score directly. Instead, they create their own "credit-based insurance scores" based on similar factors: payment history, total debt, length of credit history, and recent credit inquiries. The exact formula is proprietary, but the concept is the same.
Insurers argue this is just risk assessment, like any other factor. You have a better driving record? Lower rate. You have good credit? Lower rate. They believe your creditworthiness predicts your likelihood of filing a claim, so they price accordingly.
Whether you agree with this logic or not, it's the reality in most of the country.
Which States Ban Credit in Insurance Rates?
A handful of states have pushed back against credit-based insurance scoring and either banned it or heavily restricted it.
California bans the use of credit scores in determining auto insurance rates. If you live in California, your credit score should not affect your car insurance premium.
Hawaii also bans credit-based insurance scoring for auto policies.
Massachusetts severely limits how much credit can factor into insurance rates—it can't be the primary rating factor.
Michigan limits credit use and requires insurers to justify how they're using it.
Maryland restricts credit scoring in auto insurance.
Several other states regulate it but don't ban it entirely. If you live in one of these states, you have an advantage—your low credit score won't tank your insurance rates (though poor driving history, accidents, and violations will).
If you don't live in one of these states, credit affects your rates, and improving your credit score can literally save you money on insurance.
How Much Can a Better Credit Score Save You?
The impact varies by state, insurer, and your starting credit score, but the numbers can be significant.
Studies have found that drivers with poor credit (below 620) can pay 50-100% more for car insurance than drivers with excellent credit (above 750). In real dollars, that might mean paying $1,500 per year instead of $750. Over five years, that's $3,750 in extra costs because of your credit score.
Even moving from "fair" credit (620-680) to "good" credit (680-740) can save 15-25% on your premium. If your rate is $1,200 per year, that's a $180-$300 annual savings, or $900-$1,500 over five years.
The higher you raise your credit score, the more you save. Getting from 620 to 750 could save thousands per year in insurance alone.
This is why improving your credit score isn't just about mortgage rates and interest on loans—it directly impacts your monthly insurance bill too.
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How to Improve Your Score and Lower Your Insurance Rates
The good news: the same actions that improve your credit score for loans and credit cards also improve it for insurance purposes.
Pay your bills on time. This is the single most important factor in your credit score. Missing a car payment, credit card payment, or utility bill all show up on your credit report and lower your score. Set up automatic payments or calendar reminders so nothing slips through.
Reduce your credit utilization. If you're maxing out your credit cards, you're hurting your credit score. Aim to keep your balances below 30% of your limits, ideally below 10%. Pay down credit card debt, and your score will improve relatively quickly.
Don't close old accounts. The longer your credit history, the better. Keep old accounts open and in good standing, even if you're not using them.
Dispute errors on your credit report. Get your free credit report from AnnualCreditReport.com and check for inaccuracies. If you find errors (wrong payment status, wrong account owner, duplicate accounts), dispute them.
Space out new credit applications. Each time you apply for credit, it triggers a hard inquiry that slightly lowers your score. Don't apply for multiple cards or loans in a short time.
Build credit with a secured card. If your credit is thin or damaged, a secured credit builder card like the Self Visa® Credit Card or Kikoff is one of the fastest ways to improve your score and lower your premiums. Read our Self credit builder review and Kikoff review to compare.
Once your credit score improves, contact your car insurance company and ask if your rate can be lowered. Many insurers offer "rate re-evaluation" if your score improves. You might not get a lower rate automatically, but asking costs nothing.
You may also wonder whether paying car insurance builds credit—unfortunately, insurance payments are not typically reported to credit bureaus, so they won't directly help your score.
FAQ
Is it legal for insurance companies to use credit scores? Yes, in 48 states. It's regulated but not banned.
Do I have to tell my insurance company if my credit improves? No, but you can ask for a re-quote. Some insurers check automatically, others only when you renew.
Can I dispute my insurance score like I dispute credit scores? Insurance scores are different from credit scores. You can ask your insurer to explain how they calculated your rate, but the process for disputing is less clear. Focus on improving your actual credit score instead.
Does checking my own credit hurt my insurance rate? No. Checking your own credit is a "soft inquiry" and doesn't affect your score or insurance rates. Only credit applications trigger "hard inquiries."
If I live in California, does credit not matter for insurance at all? Correct. In California, credit cannot be a rating factor, though insurance companies can still consider other things like driving record and years of experience.
Your credit score affects more than you think. If you're paying high car insurance premiums and your credit score is low, improving your credit is an investment that pays off immediately. Get your credit report, start making on-time payments, and watch your insurance rate drop as your score climbs. With credit building tools like Self and Kikoff, you can start rebuilding your credit and lowering your insurance costs at the same time.
