Does Credit Score Affect Car Insurance?

Yes, in most states, your credit score has a significant impact on what you pay for car insurance.

Insurance companies use a concept called a “credit-based insurance score” to help predict the likelihood that you will file a claim. While this isn’t exactly the same score a lender uses for a loan, it is derived from similar information—your history of paying bills and your total debt. The central idea is that financial behavior can be a powerful indicator of driving risk, a link that has been backed by research.

The Financial Link Between Credit and Driving Risk

Academic and institutional studies have found a strong correlation between financial behavior and the likelihood of an accident.

A working paper from the Central Bank of Armenia, analyzing administrative data from its auto insurance system, found that weaker repayment histories and higher current financial burdens are strongly associated with a higher probability of being in an at-fault accident and larger claim amounts . This correlation holds true even when comparing the same individual over time; if a driver’s credit history deteriorates, their accident risk tends to rise . The study suggests that financial strain may reflect core behavioral traits or situational pressures that carry over into driving behavior .

Similarly, a study from Sejong University in South Korea, which combined insurance data with credit information, concluded that personal credit ranking has a very close positive relationship with the probability and severity of auto insurance losses .

How an “Insurance Score” is Calculated

Your credit-based insurance score is calculated using factors similar to your regular credit score but is weighted differently to predict insurance risk .

The typical weighting for a FICO Insurance Score is as follows :

• Payment History: 40%

• Amounts Owed: 30%

• Length of Credit History: 15%

• New Credit: 10%

• Types of Credit Used: 5%

This means that a history of late payments or high credit card balances can negatively affect your insurance score and lead to higher premiums.

What This Means for Your Wallet: Cost Differences by Credit Tier

The financial impact of your credit on your insurance premiums is significant. Data from the Consumer Federation of America (CFA) shows that a driver with a perfect driving record but poor credit can pay more than double what a driver with excellent credit pays .

Average Annual Premiums for Safe Drivers Based on Credit History :

• Excellent Credit: $470

• Fair Credit: $701

• Poor Credit: $1,012

A 2023 analysis by The Motley Fool found that drivers with excellent credit history paid an average of $1,947** annually for car insurance, while those with poor credit paid over double that amount, averaging **$4,145 per year . This means drivers with excellent credit saved $1,070 more than the national average, while those with poor credit paid $1,128 more .

State-by-State Variations

The penalty for poor credit varies widely by state. Some states have the highest disparities, while others prohibit the use of credit entirely.

Data Source: Consumer Federation of America (CFA) 

Companies and Their Approach to Credit

Insurance companies vary in how heavily they weigh credit in their pricing models.

Average Annual Premiums by Credit Score for Major Insurers :

Data Source: Motley Fool & CFA 

Note: Some companies have a smaller gap than others. For example, GEICO shows a smaller difference between excellent and poor credit premiums compared to State Farm .

States That Restrict Credit Use

While credit is a major factor in most states, some have taken steps to prohibit or limit its use.

• States with a Full Ban: California, Hawaii, and Massachusetts prohibit insurers from using credit history as a factor in determining auto insurance rates .

• States with Restrictions: Maryland, Michigan, Utah, and Oregon place strict limits on how insurers can use credit when setting coverage costs .

• Note: In Michigan, while credit use is restricted, drivers with poor credit still pay higher rates. This is attributed to other risk factors that correlate with credit, rather than the direct use of a credit score .

Legislation and Consumer Protections

Recent legislative efforts are focusing on transparency and fairness in how credit is used. The state of Texas is considering legislation that would require insurers to update a policyholder’s credit score at least every three years. This would ensure that premiums reflect a driver’s current financial situation, especially since credit scores generally improve over time .

In Florida, state law explicitly prohibits insurers from making an adverse decision based solely on a credit score without considering other underwriting factors. It also provides protections for consumers whose credit was adversely affected by the death of a spouse or temporary loss of employment .

Frequently Asked Questions

Does paying my car insurance bill build credit?

No. Insurance premiums are not reported to credit bureaus, so making on-time payments won’t raise your credit score .

What are “credit-based insurance scores”?

These are specific scores (e.g., from FICO, LexisNexis) that predict claim risk, not loan default risk. They use similar data from your credit report but weighted differently .

How can I improve my credit score for insurance?

A good credit score is built over time. Focus on paying bills on time, keeping credit card balances low, and limiting new credit applications .

Key Takeaways

1. Credit matters: In most states, your credit score is a significant factor in determining your auto insurance rate.

2. The penalty is high: Drivers with poor credit can pay more than double compared to those with excellent credit, even with identical driving records.

3. Shop around: Since each insurer weighs credit differently, shopping around for quotes is the best way to find affordable coverage .

4. Know your state’s rules: Check your state’s Department of Insurance website to understand how credit is used in your area.

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Disclaimer: This information is for educational purposes and does not constitute financial advice. Consult with insurance professionals for personal advice.