When it comes to car insurance premiums, many drivers may not realize that their credit score and credit history may have an impact in determining their car insurance premiums.
The pricing for an individual’s car insurance premium considers many variables, which include age, gender, the type of car you drive, where you live and work, your driving record, and your credit score.
Why Do Insurance Companies Use Credit Scores?
Insurance companies use your credit history and credit score because research has shown a strong correlation between a drivers credit history and the likelihood of filing an insurance claim. Research shows that individuals with lower credit scores are statistically more likely to have an accident or incur damage, which requires them to submit an insurance claim.
Because the insurance company considers these individuals a higher risk, it charges more for their car insurance premiums. Insurance companies refer to this practice as your “credit-based insurance score.”
State Regulations on Using Credit for Insurance
Not all states allow insurers to use credit scores as a factor when setting car insurance premiums. As of 2024, according to Experian, eight states have limitations on an insurance company using credit score data to set premiums or deny coverage.
Those eight states include California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah.
Some states strictly prohibit the carrier from using the data altogether. Other states, however, allow insurance companies to use some of the data to set premium rates, but they cannot use your credit-based insurance score as the sole factor in denying you insurance coverage.
How to Access Your Data
Most insurance companies pull data provided by LexisNexis Risk Solutions to create your credit-based insurance score. The credit-based insurance models are designed to comply with the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681, passed into law in 1970.
Individuals can find more information on the LexisNexis Risk Solutions website. If you want to request a copy of your Consumer Disclosure Report, you can visit the LexisNexis website here.
How to Improve Your Credit to Lower Insurance Premiums
Improving your credit score and your credit history can not only help you secure better loans and interest rates, but it can also lower your car insurance premiums over time.
Pay Your Bills on Time: Your payment history is one of the most critical factors in determining your credit score. A late payment on any account can significantly damage your credit score, so make sure to pay all your bills on time, including your credit cards, utility bills, personal loans, home mortgages, student loans, and any other form of credit.
Avoid Opening Too Many New Accounts: Whenever you apply for new credit, a hard inquiry appears on your credit report. Too many credit inquiries within a short timeframe can lower your credit score. Always be selective when applying for new lines of credit to avoid lowering your score for this reason.
Monitor Your Credit Report: It is a great habit to regularly review your credit report for errors or fraudulent accounts. Many credit card companies will give you a free credit report or, at a minimum, let you know your credit score on a monthly basis. Monitoring your credit and keeping those bad credit events off your profile will improve your score.
Conclusion
Depending upon where you live and obtain your car insurance, your credit score and history may play a critical role in setting your car insurance premiums. By understanding how your credit impacts your insurance rates, you can take steps to improve your credit and potentially reduce your premiums over time.