How Credit Scores Impact Car Insurance Rates

Unless you live in California, Hawaii or Massachusetts, a bad credit score could mean that you pay up to 50 percent more for car insurance than if you had a good credit score. Research by the federal government and others supports the conclusions reached by insurance companies that credit scores accurately predict the risk that a group of drivers might make auto insurance claims. While most insurance companies use credit scores when setting rates, few companies take them into consideration when you renew an existing policy.

Scoring Credit

Banks, credit-card companies and other lenders use a credit scoring system to help gauge the likelihood that you'll pay back the money they lend you. Lenders consider whether you pay your bills on time, how much debt you have, how much additional debt you could take on, if you're in default on a debt and whether you've filed for bankruptcy. Equifax's score ranges from 280 to 850; Experian's score is either from 360 to 840 or from 330 to 830; and TransUnion's score is between 300 and 850. The VantageScore, which the three credit bureaus created together, ranges from 501 to 990.

Setting Insurance Rates

Insurance companies attempt to minimize the risk that an insured motorist will have an accident and file a claim. Companies consider a driver's age, gender, marital status, place of residence, driving history and claims history to group drivers into risk categories and determine the price to charge them for insurance. While a company can't accurately predict the claims an individual driver will make, they can predict the approximate claims that a group of drivers in a specific category might have.

Research

The Federal Trade Commission conducted research in 2007 on the use of credit scores when setting insurance rates (link in Resources). The commission's conclusions were consistent with other research that found that using credit scores is an effective method of determining the amount of risk a driver represents to an insurance company. The commission also concluded that using credit scores in addition to insurance ratings would benefit many consumers, but would raise the risk, on average, for certain ethnic minorities.

Legislation and Impact on Premiums

If allowed by law, most insurance companies use a combination of your insurance risk and your credit score to decide whether to insure you and to determine your premium. California, Hawaii and Massachusetts prohibit the use of credit scores by insurance companies to determine risk. Other states, such as Ohio, prohibit the use of credit scores as the only factor used to determine insurance premiums. According to a former executive at Conning & Co., a research and analysis firm for the insurance industry, consumers with bad credit histories might pay 20 to 50 percent more in auto insurance premiums than similar people with good credit.