Why Credit Scoring Is Important to Auto Insurance

Insuring your car could cost more with a bad credit score.
i Joe Raedle/Getty Images News/Getty Images

Although it may not seem logical or fair, the cold fact is your credit score can have a dramatic impact on your car insurance premiums. Unless you live in a state that prohibits the practice, like California, Massachusetts or Hawaii, or you have a credit score above 750, you could be paying 30 to 40 percent more for car insurance if your score is idling in the bad credit lane.

Financial Responsibility

As of 2012, many insurance companies do factor a credit score into its insurance policy rates. The rationale for many is if you’re not responsible enough to pay your other bills, you're going to be just as irresponsible with your car insurance payments. In their view, they're justified charging a higher than average premium for people with low credit scores because they're a high credit risk.

Judgment Making Correlation

The insurance companies aren't just worried that you'll miss a payment. They also see your bad credit history as a sign you will not be responsible with your vehicle. That makes them believe they'll be spending money fixing your next mistake, and that's reason enough to hike your rate. You will find some insurance industry officials -- and some lawmakers in a handful of states -- who disagree with this philosophy. If you think your premium is too high, ask your agent if your credit score played some role in the rate.

Premium Reducing Strategies

There are ways for a prospective driver with a poor credit score to reduce her premiums. The first course of action is to shop for car insurance companies who don't participate in credit scoring. Research insurance company practices, and ask specific questions about what their premiums are based on before you buy. "How" you pay may matter too. The company may be less inclined to consider a credit history if you're paying the policy in full up front instead of monthly or quarterly installment payments.

Increasing Your Score

If you have to pay more for anything due to a bad credit score, you owe it to yourself to fix that problem. Make a concentrated effort to pay all your bills on time. Pay credit cards off first and installment loans second. Bring high balances down and keep the ratio of credit limit used to credit limit available to 30 percent or lower. This should reduce your costs across the board and bring less stress to your life.

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