There are a lot of different factors that go into calculating your car insurance rates. Some of these factors are obvious, such as your driving history and the value of the vehicle being insured. Others are a little less expected, like gender and marital status.
One unexpected factor in determining your auto insurance premiums can be your credit score. A credit score may seem like a bizarre thing to use to determine car insurance prices, but almost every auto insurance provider does this. However, if you live in California, Hawaii, or Massachusetts, you don’t have to worry about your credit score when you’re purchasing automotive insurance; in these three states, it’s illegal for insurance companies to use your credit score to determine your rates.
Why Do Car Insurance Companies Use Credit Score to Calculate Rates?
Usually, when someone uses your credit score (such as a potential landlord or a car dealership), it’s to determine how capable you are of paying off what you are trying to purchase. Since car insurance companies only provide you with their service when you pay for it, they don’t really need to worry about this; if you’re unable to make your car insurance payments, they’ll simply stop insuring you. That’s part of why it’s unintuitive that auto insurance providers factor in your credit score when determining your car insurance rates.
However, studies have shown that drivers with low credit scores are more likely to be involved in accidents, and that the accidents are, on average, more serious. In other words, if you have a low credit score, it’s more likely that an insurance company will lose money by covering you. To help adjust for that risk, companies usually charge you a higher premium.
How Do Car Insurance Companies Calculate Your Credit Score?
Car insurance companies don’t use standard and well-known credit scores. Instead, they take your FICO or Experian credit score, plug it into their own algorithm, and create their own credit score for you. By doing this, car insurance companies are able to create a credit score that they believe more accurately reflects your potential risk as a driver.
How Much Do Car Insurance Companies Prioritize Credit Score?
Every auto insurance provider has a different equation for determining their rates. Each company relies more heavily on certain factors and less heavily on others. As such, there’s no single way that your credit score is used to determine your auto insurance rates.
If you want to know how much value a car insurance company places on credit scores, you can call and ask them. Usually, insurance providers are transparent about what factors go into their quotes so they can help you get a feel for how you can improve your rates. So if you need to find a car insurance company that doesn’t factor your credit score heavily, you can shop around.
There are many critics of using credit scores to help determine car insurance rates. They believe that it’s not a fair factor to take into account, or that the relationship between credit score and accident probability is correlation but not causation. This is partially why three states don’t allow credit score to be a factor. However, it’s still a prevalent factor in most states, so it’s good to be aware of it.