Does Your Credit Score Affect Car Insurance?

Your car requires a lot from you. From a car note, to car insurance, to maintenance, your car is something that can be costly. One of the biggest expenses that people deal with when it comes to their cars is auto insurance. In fact, on average Americans spend about $1,655 a year on car insurance alone. Countless Americans can find themselves overpaying on auto insurance. Sadly, so many people overpay on car insurance that it is costing Americans $21 billion a year! That is why it is important to not only understand auto insurance, but to know what factors impact how much you pay.

What is Auto Insurance?

Car insurance may seem simple but it can be more complex than people realize. Many people think that car insurance is a requirement in all 50 states but that’s not true. Instead, it is a requirement in all states except for New Hampshire and Virginia. So while it may not be a requirement in every state, it is still an expense that most people need to deal with.

Car insurance is the agreement between you and your insurance company. This agreement states that you will make a monthly payment (known as your monthly premium) in exchange for the insurance company to protect you against financial losses that come from your vehicle.

Sadly, when people get auto insurance, they often do not handle the process in the best way that they can. That can lead people to overpaying on car insurance premiums every month.

What are the Different Car Insurance Coverages?

There are six common types of coverage that people can expect to see when they are looking for their auto insurance coverage. Every state will have different requirements so when learning about your coverage options you will want to confirm what you need for your state specifically. The six different types of coverage includes:

  • Collision Coverage
  • Comprehensive Coverage
  • Liability Coverage
  • Medical Payments Coverage
  • Personal Injury Protection (PIP)
  • Uninsured and Underinsured Motorist Coverage

Besides these six main types of coverage, there are other types of insurance coverage which include:

  • Classic Car Coverage
  • Gap Coverage
  • New Car Replacement Coverage
  • Rental Reimbursement Coverage
  • Ride-Sharing Coverage
  • Sound System Coverage
  • Towing and Labor Cost Coverage
  • Transportation Expense Coverage

Collision Coverage

Sometimes collisions can be avoided. For example, if you are at a red light and someone hits the back of your car, there’s typically nothing you can do to avoid that. If you are in an accident then collision coverage can help you deal with the damages.

Comprehensive Coverage

Damage can happen to your car in plenty of different ways whether through hail, fire, theft, or even vandalism. If your car goes through an event that results in damage, then you may be able to benefit from this type of coverage. This type of coverage has a deductible which is what the insured will need to pay out of pocket before their insurance company steps in to cover the damage claim.

Liability Coverage

This is the coverage that is required by a majority of states. There are two parts of liability coverage that are important to know about. There is:

  • Bodily Injury Liability
  • Property Damage Liability

Medical Payments Coverage

Oftentimes you will need different pieces of coverage to insure different parts of life. This means medical payments coverage is something that may be worth considering. If you are injured and need help paying for costs that come from these vehicle injuries then you may be able to benefit from this option.

Personal Injury Protection

Also known as PIP, this coverage option pays medical expenses that happen after an accident. But it may also be able to cover other expenses like child care, lost income, etc. This is another layer of protection that can provide even more support.

Uninsured and Underinsured Motorist Coverage

Let’s say that you get into an accident with someone that doesn’t have insurance. You can find yourself in a tough situation. That’s because if the accident is bad enough, you can run into liability limits with underinsured drivers or no coverage with uninsured drivers. This type of coverage can help in events like this.

What Factors Impact Your Premium?

Your premium is the monthly payment that you will be responsible for paying to your insurance company. However, there are many factors that impact your car insurance rates. This includes:

  • Car Information
  • Personal Information
  • Your Driving Record
  • Your Location

Car Information

If you have an expensive car, it will cost insurance companies more money when dealing with costs that come along with claims on your vehicle. For example, a 2010 Chevy Impala will cost less than a 2017 BMW 320xi. Expensive cars mean a more expensive payout for insurance companies which can result in higher car insurance rates.

Personal Information

Another important factor of your car insurance rates is your personal information. Both your gender and age will impact how much you pay. While some people can feel like that’s discrimination that’s actually not the case. That’s because certain groups of people can have a higher risk to insurance companies. On average, a younger driver will pay more than an older driver. Also, generally, men will pay 12% more than women.

Not only does your gender and age play a part in your insurance premiums, but your credit score can as well. That’s because some insurance companies consider your credit score when it comes to deciding your car insurance premium.

Your Driving Record

Your driving habits also play an important role when it comes to your premiums. Drivers that drive more frequently, have marks on their record like DUIs, or those that have a history of getting into collisions will generally pay more than drivers that do not deal with these things. A driver that barely drives, with a clean record will typically have a more affordable premium!

Your Location

Not every state has the same average premiums. Some states are more expensive than others. That’s because each state will have its own set of challenges that drivers face. In fact, it can vary so much that on average the cost of car insurance varies by $4,004 annually depending on the state of the insurance policy.

Let’s Talk About This Factor of Your Premium: Your Credit Score

One factor that people may not realize impacts their insurance rate is their credit score. Your credit score is important in a variety of parts of life. Your car insurance rate is on that list!

What is a Credit Score?

Your credit score is a number that’s typically between 300 and 850. This number is what lenders use in order to better understand how you deal with your credit. Many people don’t realize that this score is calculated by credit bureaus. Credit bureaus use information that is found on your credit report. Your credit report contains information about your credit file like your on time payments, credit accounts, and more.

There are three major credit bureaus which are Transunion, Equifax, and Experian. These credit bureaus use a scoring model in order to understand how each item on your credit report will affect your score. There are two main scoring models:

  • FICO Scoring Model
  • VantageScore Model

However, the FICO model is way more popular. That’s because it is used by 90% of top lenders!

What Factors Impact Your Credit Score?

There are 5 main factors that can impact your credit score. Keep in mind that the FICO scoring model is the popular scoring model. That is why we will be using this model as reference for the factors listed below and how they can affect your credit. These factors include:

  • Payment History
  • Credit Usage
  • Length of Credit History
  • Variety of Credit
  • Hard Inquiries

Payment History

Your payment history is at the top of the list when it comes to factors that can impact your credit score. That’s because it can easily show lenders how you handle your credit. This factor accounts for 35% of your score.

Credit Usage

Your credit usage refers to your credit utilization ratio. This ratio looks at the amount of credit you’re using compared to your overall credit limit. This factor accounts for 30% of your credit score.

Length of Credit History

The age of your credit is known as your length of credit history. The age of your credit impacts 15% of your score. Your credit history can include information about your newest accounts, oldest accounts, and more.

Variety of Credit

There are two main types of credit accounts. There are installment loans and revolving credit. Installment loans include loans like mortgage, car loans, and more. An example of revolving credit includes a credit card. This factor accounts for 10% of your credit score.

Hard Inquiries

Hard inquiries, known as hard pulls, allow lenders to get a deeper look at your credit file. They account for 10% of your score. It’s important to note that hard inquiries need this access in order to determine your eligibility.

Do Car Insurance Companies Check Your Credit?

Potentially! Every car insurance company is different. However, you can expect your credit to be checked if the insurance company you are trying to get coverage at uses a credit based insurance score to determine risk. However, a credit based insurance score is not available everywhere because the practice has been banned in California, Hawaii, and Massachusetts.

What Credit Score is Good for Car Insurance?

If you want to try to get competitive rates, then you should aim to have a credit score that’s between 670 and 739. However, we want to remind you that it varies by insurance company!

Commonly Asked Questions

Understanding your credit score and your car insurance rates can be tricky. You may be wondering questions like, “Does your credit score affect car insurance premiums?” or “What are popular insurance companies?” Other people have felt the same way and had questions when learning about this topic too!

Does Your Credit Score Affect Car Insurance Premiums?

It can! That’s because some insurance companies consider your credit score when determining your car insurance premium.

What is the Average Price for Car Insurance Rates?

Average auto insurance premium prices vary based on different factors. For example, a 16-year-old will have an average annual premium of $6,777 compared to a 55 year old that has an average annual premium of $1,690.

What is a Credit Based Insurance Score?

Let’s start off with just a normal insurance score. An insurance score is a rating calculated by insurance companies. Your insurance score will represent the probability that you have of filing an insurance claim under your coverage policy. A low insurance score can represent a higher risk to the lender. On the other hand, a high insurance score can mean the insurer deals with less risk.

One type of insurance score to be mindful of is a credit based insurance score. A credit based insurance score is a rating that depends on a consumer’s credit score in one way or another. These scores use parts of a consumer’s credit history to better understand the risk they face when it comes to insurance losses.

What are Popular Car Insurance Companies?

Popular and affordable car insurance companies include:

  • USAA
  • Geico
  • State Farm

Can Your Credit Score Affect Premiums?

Yes! As we said earlier, you can expect to see your credit score affect premium rates when dealing with credit based insurance scores. This can be a piece of personal information that impacts your score. However, it varies by insurance company.

Will Your Car Insurance Payment Show up on Your Credit Report?

You shouldn’t expect your car insurance company to report your car insurance premium payments to the credit bureaus. That means that the account will not show up on your credit report. However, if you fail to pay your premiums then the unpaid balance can be sent to a collection agency where it will likely show up on your credit report.

What is a Poor Credit Score?

Each scoring model will have its own definition when determining if someone has a poor credit score. For the FICO scoring model, a poor credit score would be between 300 to 579. On the other hand, for the VantageScore model a poor credit score would be between 500 to 600.

Bottom Line

Most people need to deal with the cost of auto insurance in one way or another. However, auto insurance may seem simple but it can be more complex than people realize. Auto insurance is the agreement between you and your insurance company. This agreement states that you will make a monthly payment in exchange for the insurance company to protect you against financial losses that come from your vehicle.

One factor that can impact the monthly payment you have to make to insurance companies includes your credit score. That’s because some insurance companies consider your credit score when determining your car insurance premium. If you want to try to get competitive rates, then you should aim to have a credit score that’s between 670 and 739. However, we want to remind you that it varies by insurance company!

Article References

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