How Monitoring Credit Score Can Help You Save On Car Insurance
When you think about how to lower your car insurance rates, there are probably several things that come to mind. Developing safer driving habits, seeking out applicable discounts, and shopping around for lower premiums are all great ways to make sure you’re protected on the road without breaking the bank. However, in most states there is another seemingly unrelated metric that insurers look to when they are determining rates – your credit score.
In 2023, drivers with poor credit paid an average of $3,358 annually for car insurance (that’s 84% higher than the national average of $1,824). While this may feel like just another data point carriers can use to justify charging an arm and a leg for insurance, there is a bright side to consider. Unlike factors such as your age and zip code, your credit score is one factor that’s usually within your control, and you can use it to your advantage, in fact, Americans with excellent credit save an average of 17% annually on their car insurance. When compared to those with good credit.
Why does credit score matter for car insurance?
First, it’s important to note that credit score is not a factor for car insurance in every state. California, Hawaii, and Massachusetts all have regulations in place that prevent insurance companies from using credit score as a rating factor. For every other US state, though, insurance providers look at credit score to help them determine a drivers’ risk profile.
When it comes to setting rates, carriers only really care about one thing: financial risk. If you present a low level of risk, they will be more willing to give you a lower premium, and vice versa. While it may seem like there is no correlation between your credit score and the likelihood that you will file a claim, there has been research that suggests a statistical relationship between financial responsibility and insurance losses.
To put it simply, it has been shown that individuals with high credit scores and a history of consistently making payments on time are less likely to file an insurance claim, while the opposite seems to be true for those with poor credit scores.
How insurance companies evaluate credit score
When a provider looks at your credit score, it’s safe to assume they are not taking it at face value. The majority of insurers will take your credit score and use it to calculate a unique credit-based insurance score and then look to that as a representation of your credit score and your level of financial responsibility.
The difference here is that credit-based insurance scores don’t consider personal details like your gender, job, or income history. Rather, this number is only meant to represent the length of your credit as well as your payment history. According to the Insurance Information Institute, these are the most pertinent indicators of risk for an insurance company.
Factors that impact your score (and how you can improve them)
The most obvious way that you can work to improve your credit-based insurance score is to make sure you’re not behind on any payments. This applies to credit card balances, any outstanding bills, taxes, and any additional fines or fees you might be responsible for.
It’s also important to remember to update your insurance carrier if you have experienced a hit to your credit score due to an extraordinary life circumstance such as a serious illness, a job loss, or a catastrophic event. In extreme life events like this, an insurer might be able to work with you to control your rates.
Another factor considered in this score is the amount of debt you have in relation to your credit limit. If you have more accumulated debt than credit available, bridging that gap will likely help to improve your credit-based insurance score and make you appear less risky to insurance companies. Furthermore, the amount of credit inquiries you run also impacts your score, so be sure you’re not checking your score too often.
Lastly, since your length of credit is considered in this score, starting to build credit early on is a good way to set yourself up for success. Having a long history of good credit shows insurance companies that you are financially responsible and will make them feel more comfortable assigning you a lower rate.
Every company weighs credit score differently
No two insurance companies are created the same. Depending on their own regulations as well as the guidelines set forth by your state, different insurance companies will assign a different weight to credit scores when calculating personalized rates. This is why monitoring and improving your score is not always enough, shopping around for insurance and comparing multiple different providers is still essential when it comes to controlling your insurance premiums.
Jason Wootton is the chief strategy officer of Rate Retriever. He assists MGAs on their go-to-market plans, helps launch insurtechs and collaborates with carriers on acquisition and technological solutions. His work history includes prominent roles at Fenris Digital, Motion Auto, LeadCloud and Honest Policy.
