How Your Credit Score Can Affect Your Insurance Premiums

Credit scores are used to determine how credit-worthy a person is. Banks and lending institutions use these numerical values to allow an assessment of risk related to loan applications. Auto insurance companies review your credit history to determine your risk factor and assign rates accordingly. If you habitually pay bills late or don’t have an extensive credit history, be prepared. With a low credit score insurance rates will likely be high.

Note: Not all states allow credit scores to be used by insurance companies to determine rates.

Soft Hits vs. Hard Hits

When you receive a quote for auto insurance, part of the process involves the company checking your credit history. This credit check will not negatively affect your score because it is considered a “soft hit.”

All credit history inquiries fall into one of two categories: Hard hits and soft hits. Inquires such as applying for a credit card or a mortgage loan are considered hard hits and can stay on your credit report for years, possibly lowering your credit score. Inquiries that do not appear on your credit report and do not affect your score negatively are considered soft hits.

Factors that Affect Your Rates

Your credit score is not the only consideration used to determine your auto insurance rates; excellent credit does not necessarily equate to low premiums. Depending on your state and your auto insurance carrier, any of the following factors might affect your premium:

  • Your vehicle’s make, model, and year.
  • Your driving record.
  • Your location.
  • Your vehicle’s safety features.
  • Your car’s primary use.
  • Your annual mileage.
  • Any discounts that you qualify for.

For example, your rates may be affected by the fact that you live in an area with a high crime rate and drive a car make or model that is commonly stolen. Your higher premiums will reflect that you represent a higher risk to the insurance company.

If your goal is to get the most affordable auto insurance rates, having a solid credit score and a good driving record are two ways to help yourself in that direction. You may also want to investigate the possibility of taking a defensive driving course to qualify for additional discounts on your premiums.