Credit Rating Can Affect Car Insurance Rates

You may already know that car insurance companies use a long list of factors to determine how much each of us will pay for car insurance. Things they take into consideration include:

- age and sex of driver
- driver history
- make and model of the car we drive
- geographic location

What you may not know is that credit ratings are also factored in. This suggests that a poor credit rating could possibly have a negative effect on insurance rates. Indeed, that is exactly the case.

The Definition of “Credit Rating”

Before we talk about how your credit rating affects your car insurance rates it’s necessary to explain the credit rating process. In the United States a consumer credit rating is expressed in a number that can range anywhere from 300 to 800, depending on the baseline used.

That number is the result of a mathematical equation created by two engineers in the 1950s. They created the formula to see if they could predict if, and when, a consumer would default on his credit. Surprisingly, their formula turned out to be an incredibly accurate.

When this mathematical formula is applied to an individual, the resulting number is known as the “credit score.” That score tells a bank, store, or insurance company how likely you are to miss payments or fall permanently behind. Most notably, it predicts the likelihood that you will fall behind within the first six months of establishing credit.

Credit Rating Can Affect Car Insurance Rates

Credit Rating and Car Insurance

Your credit score is important to an insurance company because they need to be confident you will make all of your payments on time and without question. They are depending on your payments as a means of helping support their cash position while also giving them some money to invest. If you have a low credit score your insurance company has reason to worry that you will miss a payment or two.

If you have a bad credit score (below 500 is considered bad) you’re likely to see higher car insurance rates. You can bring those rates down in the future by improving your credit score. As an added bonus, an improved credit score means your financial situation is healthier all the way around.

State Laws

By and large, state laws make it perfectly legal for insurance companies to consider your credit rating when determining your car insurance rates. But most of them make it illegal for an insurance company to refuse to cover your based only on your credit score. In other words, it can be a factor, but your credit score cannot be the sole determiner of your rates or whether or not you get a policy.

In addition, if you are rejected by an insurance company, state laws require that company to inform you in writing; they are required to include the reasons for rejecting you in their statement. If you see your credit score as being a factor, you know you need to work on improving that.

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