You are probably aware factors like your driving record, vehicle type, and zip code impact your car insurance rate. But what about your credit score? Your financial habits and history can impact how much you pay in premiums each year…
How Much Can Your Credit Profile Influence Your Auto Insurance Premium
In many states, including Florida, drivers with poor credit profiles pay substantially more for coverage than those with excellent credit profiles. Here are the typical impacts of credit on insurance pricing.
Premium Increase: A drop of one credit tier may raise an insurance premium by 17% or more.
Legal Use: Insurers in most states can legally use credit scores as a pricing factor when determining a driver’s risk.
Variability: The degree of premium increase varies significantly by state and insurer; in some cases, the difference in annual cost is more than double.
Why Credit History Matters for Auto Insurance Pricing
Insurers utilize credit-based insurance scores primarily for three reasons:
Risk Proxy: Insurers view a strong credit history as a proxy for lower overall risk, associating more consistent payments and fewer financial stressors with historically fewer claims.
Improved Risk Differentiation: Credit-based insurance scores allow insurers to incorporate nondriving behavior risk factors into pricing models, which significantly improves risk differentiation and, subsequently, profitability.
Algorithmic Pricing: Because auto insurance is priced based on risk classes, many insurers integrate credit scoring as a key component of the pricing algorithm, alongside driver history, vehicle type, location, and other rating factors.
What You Can Do if Your Credit Profile Is Weak
Drivers can take the following steps to help mitigate their impact on premium costs:
Regular Monitoring and Correction: Insurers use a score tied to the consumer’s credit file, so inaccuracies matter. It is essential to monitor credit reports regularly and dispute any errors immediately.
Improve Financial History: Improve payment history by staying current on all bills and keeping revolving debt levels low. These habits are key components for an insurance-friendly score.
Compare Insurer Practices: Shop for insurers whose underwriting practices place less emphasis on credit scores. This is especially relevant in states where credit use is restricted or banned.
Inquire About Other Factors: Ask an insurer or agent what other factors are weighted heavily in the state, such as driving record or vehicle safety features, so those areas can be strengthened.
Geographic Advantage: Drivers who move to, or live in, a state where credit scores are not allowed as a rating factor will benefit from this legal protection.You can read more here.
The good news is, there are steps you can take to improve your credit score over the short and long term. And it is never a bad idea to look at your expenses, like insurance, to see where there are opportunities to save money.