Your credit score might feel like just another financial number to keep track of, but did you know it could significantly impact your auto insurance rates? That’s right—not only do lenders care about your credit score, but so do insurance companies. For many drivers, understanding this connection can unlock opportunities to save hundreds of dollars a year.

If you’ve been surprised by your car insurance premium or wondering why credit scores matter in this context, you’re in the right place. Here’s a breakdown of how your credit score affects your auto insurance rate, why insurers use it, and some practical ways to improve your score to save money.

How Your Credit Score Influences Auto Insurance Rates

Insurance companies use a tool called a credit-based insurance score to assess your likelihood of filing a claim. It’s not identical to your traditional credit score but is closely related. This score takes factors from your credit report, weighs them differently than what a lender might, and determines your "risk level" as an insurance customer.

Why Insurers Use Credit Scores

According to insurers, studies show that there’s a correlation between credit scores and the likelihood of filing claims. Essentially, individuals with higher credit scores are seen as more financially responsible and, therefore, less likely to file frequent or costly claims. That’s why in states where it’s allowed, drivers with excellent credit scores typically pay lower premiums than those with poor or average credit.

For example:

  • A driver with a high credit score (say 750 or above) is likely to secure a lower premium because they’re seen as less risky.
  • On the flip side, a driver with a low credit score (below 600) might pay considerably more, even if they have a clean driving record.

This may seem unfair to some, but insurers view credit-based scores as a reliable predictor of risk, just like they use factors such as your driving history or mileage.

How Does This Vary by State?

Not all states allow insurers to use credit scores when calculating auto insurance rates. Some have banned or restricted the practice due to concerns that it unfairly penalizes drivers struggling with financial hardships. Here’s a quick overview of how it works across the U.S.:

States That Restrict or Prohibit Credit Scoring

California, Hawaii, and Massachusetts are the only states that completely prohibit auto insurers from using credit scores to set rates. Insurers in these states rely more heavily on factors like your driving record, age, car type, and location.

States That Regulate Its Use

Other states allow credit-based insurance scores but regulate how they’re used. For instance, some states require insurers to disclose to customers when their credit score has affected their premium.

States Without Major Restrictions

Most states permit the use of credit scores with little to no regulation. If you live in one of these states, your credit history could have a significant impact on your premium.

What Factors from Your Credit Report Affect Rates?

While your detailed credit score isn’t the same as your credit-based insurance score, certain aspects of your credit history can influence both scores. Here are the key factors insurers typically consider when assessing risk through credit history:

  1. Payment History - Have you been paying your bills on time? Late payments, especially consistently missed ones, indicate a higher risk and might lead to higher premiums.
  2. Outstanding Debt - If you’re carrying a large amount of debt compared to your available credit, insurers may view this as a red flag.
  3. Credit History Length - A longer credit history demonstrates financial stability, which could work in your favor when calculating insurance rates.
  4. Recent Credit Activity - A flurry of new credit applications can signal financial stress and might negatively impact your insurance score.
  5. Credit Utilization - Insurers pay attention to how much of your available credit you’re using. A high credit utilization ratio can hurt your score more than you might think.

Common Misconceptions About Credit Scores and Insurance Rates

When it comes to credit scores and auto insurance, there’s no shortage of misconceptions. Clearing these up can help you make better financial decisions.

“A Low Credit Score Automatically Means High Premiums”

Not necessarily. While a low credit score can affect your rate, it’s just one piece of the puzzle. Insurers also examine your driving record, location, vehicle type, and coverage choices.

“Checking My Credit Score Will Lower It”

Checking your own credit score counts as a soft inquiry, which doesn’t affect your score. On the other hand, a hard inquiry, like when applying for a loan, could lower your score slightly.

“Insurers Look at My Full Credit Report”

Insurers don’t have access to every detail in your credit report. They use credit-based insurance scores, which focus on specific credit-related factors rather than your entire credit history.

How to Improve Your Credit Score to Lower Insurance Costs

The good news? Improving your credit score can not only unlock better financial opportunities but also lower your car insurance premiums. Here are some actionable steps to get started:

1. Pay Bills on Time

Your payment history is one of the biggest factors impacting your credit score. If you struggle to remember due dates, set up automatic payments or reminders.

2. Lower Your Credit Utilization

Aim to use less than 30% of your available credit limit. For example, if you have a $10,000 limit across all your credit cards, try to keep your total balance below $3,000.

3. Check Your Credit Report for Errors

Mistakes on your credit report, such as accounts that don’t belong to you or incorrect balances, can hurt your score. Request a free credit report annually from each of the three major bureaus (Experian, Equifax, and TransUnion) at AnnualCreditReport.com and dispute errors immediately.

4. Reduce Outstanding Debt

Paying down high balances not only improves your credit score but also demonstrates financial responsibility to insurers.

5. Keep Old Accounts Open

Long-standing credit accounts contribute positively to your credit history. Avoid closing older accounts unless absolutely necessary.

6. Space Out New Credit Applications

Opening multiple credit accounts in a short period can make you look financially unstable. Be strategic about applying for new credit.

7. Consider a Secure Credit Card

If your credit score is low, using a secured credit card responsibly can help you rebuild your credit.

Take the time to review your credit report, identify areas for improvement, and consider how this can affect your car insurance costs. And if you’re shopping for a new policy, don’t hesitate to ask your provider how credit affects your rate.