How Bad Credit Affects Insurance Rates

Get Car Financing
Even with poor credit.

By

Automotive Editor

John Diether has been a professional writer, editor, and producer since 1997. His work can be found on TV, radio, web, and various publications throughout the world.  He is a graduate of Northwestern University and has a 1992 Cadillac Brougham d’Elegance in his garage. 


, Automotive Editor - May 5, 2016

CarsDirect Fact: In many states, bad credit can mean higher insurance premiums. That's why improving your credit rating with timely payments on a new or used car loan may also reduce your monthly insurance costs.

We all know that derogatory marks on your credit report affect your ability to borrow money. Late payments or a lot of existing debt means you might not get the amount you need, be faced with a stiff interest rate, or get turned down completely. It also means you could pay more than you need to for car insurance.

Nearly all insurers use the information in your credit report when calculating your annual premium. Although your credit might seem unrelated to your driving record, studies have shown that drivers' creditworthiness affects the likelihood that they will file an insurance claim. This has been confirmed by the Federal Trade Commission, universities, and other impartial sources. Fair or not, your history of handling credit is one of the many factors companies consider (except in Massachusetts, Hawaii, and California, where the practice is banned).

Apply for pre-approval from a trusted CarsDirect dealer that understands your credit situation »

Keep in mind that insurance companies don't look at your credit score per se, but your total credit picture. Each uses a proprietary formula that takes into account different types of information found on your report. The company then assigns you a credit-based insurance score that's very different from your FICO score. There is no universal method of determining this score or how it will affect your premium. Each insurer has its own criteria and practices.

What we do know is that credit-based insurance scores have a wide range, just like FICO scores. Drivers can fall anywhere in the spectrum, from perfect (according to the insurer's criteria) to having no credit at all. Because your credit is just one factor that goes into setting premiums, it's difficult to pinpoint how much a lower score will cost you.

Get matched with a dealer that specializes in loans for buyers with bad credit »

However, research has shown that drivers who score in the insurance companies' lowest brackets pay between 25 and 60 percent more than drivers in the top tier. That's not to say a perfect score will get you a rock-bottom premium, but it will contribute to your overall insurability and can mitigate the negative effects of other factors like age or blemishes on your driving record.

While credit-based insurance scoring is a proprietary process, it's not a total mystery. The same factors, good and bad, that determine your FICO score are likely to affect your insurability as well. That means you want to keep all accounts in good standing, limit your use of available credit, and avoid excessive credit inquiries. It's also a good idea to keep any older credit card accounts open (even if you no longer use them) to maintain the length of your credit history.

Let us help you find a dealer that wants your business »

Free Credit Score

Get your free credit score now! Get a copy of your most recent credit score.

Get Your Free Score

Auto Insurance

Get competitive quotes on insurance in your area.

Sell Your Car

We will buy any car, running or not, with or (in most cases) without the title.

Get My Price

Need a Car Loan?

It only takes a minute.

, Automotive Editor

John Diether has been a professional writer, editor, and producer since 1997. His work can be found on TV, radio, web, and various publications throughout the world.  He is a graduate of Northwestern University and has a 1992 Cadillac Brougham d’Elegance in his garage. 


Loan approval is not guaranteed and is subject to credit application and approval of the lender. Individual loan terms may vary. Use of this website constitutes acceptance of CarsDirect.com's Terms of Use, Disclaimer, Privacy Policy, and Cookie Policy.

Privacy Policy|Terms of Use|Cookie Policy|Disclaimer
COPYRIGHT 1999-2019 MH Sub I, LLC dba CarsDirect.com