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How Does Your Credit Score Affect Auto Insurance Rates?

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In previous articles we have discussed how factors such as age, or marital status affect the cost of your car insurance rates. There are however, several other factors that determine the cost of premiums, and one surprising factor is your credit score. Not every company asks for it when you get a quote, but a glance at insurance company rate manuals, as well as several studies from over years makes it very apparent they are using your credit score to influence your rate. 

What is the Effect of Credit Score On Rates?

We took a look at car insurance quotes from Utah where we used a mock profile to obtain the auto insurance quotes. The profile we used was that of a 30 year old male, single, and a homeowner with a 2014 Toyota Corolla. The only thing we changed was our reported credit score on a scale of poor to excellent, to quantify the impact of credit score on costs. Here are the annual rates for our sample driver living in Salt Lake City, assuming different credit scores.

slc

We conducted the same analysis with the same mock profile for rates in New York City as well to see if there was a difference based on location. In general, the rates showed a proportional decrease from each credit score group to the next. Our driver living in New York saw these sample annual rates from insurers:

nyc

As the data shows, there is a significant change in monthly premium between those with an excellent and poor credit score. A $1,279 or 62.5% difference in yearly price exists for our benchmark driver living in Salt Lake City while a $3,348 or 69% difference in price exists than his peer in New York. When we opted to say we did not know our credit score, the quotes that were returned seem to be on par with someone with a "fair" credit score. That does not mean you can get away with not submitting a score. Once a company has access to your social security number, they will likely be able to determine your credit score -- your premiums might change as a result after your preliminary quote estimate.

Monthly premiums have a predictable price difference for our sample driver with each level of credit score. In Salt Lake City, premiums changed an average of $319.80 or 15.8% between levels for our single guy, with the highest change being 17.3% between those with "excellent" and "good" credit scores. Our New York City driver's rates were also consistent, with an average difference of $837 or 17.7% between each level with the highest being 22.1% between those with "good" and "fair" credit. 

How Does a Credit Score Affect Rates Exactly? 

It is not as simple as “693 FICO score= $X premium”. Rather, insurance companies will take your full credit report and run it through an algorithm to calculate an “insurance score”. An insurance score isn't a measure of how creditworthy you are but rather how "risky" you are from an auto insurance perspective, based on your creditworthiness. There is much debate about whether there is even a true correlation, nonetheless, insurance scores are here to stay.

How much they affect your premium can vary between states. According to a study by the Federal Trade Commission, California, Hawaii and Massachusetts ban the use of any sort of credit report as a factor in determining insurance rates. Instead, the states opt to base rates solely on driving record. Other states, although they allow the use of a credit report, have different restrictions when it comes to using them in insurance premiums according to an Allstate filing. Furthermore, different companies like Allstate will have different ways of determining their “Insurance Scores”. In the filing we referenced, Allstate describes factors such as "Number of 30 days Past Due Payments in the Past Year" or "The Current Amount Due" which is your outstanding balance for all open credit lines. These are some of the factors that go into calculating your credit score any way.

What about between companies? Of the three major national companies we analyzed (State Farm, Allstate and Nationwide) for our example motorist, Allstate had the greatest difference between excellent and poor credit with an 88% difference while Nationwide had the smallest of 56%. What is interesting is, if our driver has excellent credit, State Farm rewards him the most, but if he has poor credit, it is Allstate who will be most penalizing when it comes to rates. You can see how his quotes change for different credit levels across three major insurance companies below. Your actual quotes will differ based on your exact credit score and other factors.

Insurance CompanyPoor Low Fair Good Excellent 
State Farm $3,852 $3,108 $2,484 $2,004 $1,644
Allstate $5,400 $4,056 $3,432 $2,436 $2,088
Nationwide $10,320 $9,408 $7,356 $6,564 $5,796

What Can You Do If Your Credit Score Changes? 

If you have a poor credit history, and do not have the fortune of living in California, Massachusetts or Hawaii, your rates will be higher compared to someone like you, but with better credit scores. The good news is, if you have worked to raise your creditworthiness, you are eligible for a new rate. If you know your credit rating has gone up, refiling your information to your insurance company will get you a better rate. Raising your credit score can mean savings of up to $3,348 per year in a city like New York. You may not be able to control your gender, or age, but credit score is certainly one way of lowering your car insurance premiums.

Sources:
Federal Trade Commission: Credit Based Insurance Scores
North Carolina Department of Insurance Allstate Filing

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