How Does Poor Credit Affect Car Insurance Rates?

Car insurance is a must-have for your peace of mind. Not to mention, it is also a legal requirement in most states.

Purchasing car insurance can be challenging, especially if you have poor credit. Depending on where you live, your credit score can be a crucial factor in getting approved for car insurance. Plus, it affects your premiums.

If you have a bad credit score, you are probably worried. Read on as we explore its potential impacts on your car insurance rates and what you can do about it.

Understand Credit-Based Insurance Score

Before applying for auto insurance, take note that a credit-based insurance score is different from a regular credit score. They both give a snapshot of your financial health and history, but their computations consider different factors.

Your credit score measures your creditworthiness, providing an idea of repayment. It can be more difficult to find a company willing to offer a loan. Luckily, despite such a situation, some are more considerate. For instance, you might want to consider CreditNinja 800-dollar loans. No credit check is required, so you do not have to worry about your credit score.

On the other hand, a credit-based insurance score shows how risky you are from the perspective of the insurance company. It predicts the chances that you will file an insurance claim, which means that you will cost the company a lot more money.

However, while a credit-based insurance score can be a significant factor when getting auto insurance, it is not the only thing that matters. Your location, make and model of car, and driving behaviors are other things that can affect car insurance.

Why Insurers Look at Your Credit Score

One study from the Federal Trade Commission provides an in-depth look at how credit-based insurance score affects car insurance rates. In most states, drivers with poor credit are positively linked to the number and cost of car insurance claims, so they are at a higher risk. These customers will cost insurers more.

A common misconception is that insurance companies will use the credit score to determine if the insured can pay on time. While it looks at past delinquencies and debt ratios, the main purpose of the credit score is not to assess the ability to make timely payments. Rather, it is for the estimation of the number or cost of insurance claims that the applicant will file. This will help insurers predict their insurance losses.

Impact of Poor Credit on Car Insurance Rates


The most important reason why insurers look at your credit score is to determine the premium that you will be charged, making it an important component of the underwriting process. Because of the inherently higher risks in drivers with poor credit, companies will raise their premiums. This is one way to offset the potential payouts from such a group of policy holders.

More so, a poor credit score can also be a reason for you to be denied coverage. Although, this is rare since it is not the only thing that insurers look at. Your credit rating is more relevant in the calculation of premiums than in deciding whether you are denied coverage.

Take note that there are states that ban looking at the credit scores of applicants for auto insurance. California, Hawaii, Maryland, Massachusetts, Michigan, Oregon, Utah, and Washington are the states that partially or fully ban companies from using credit scoring in insurance policies. If you live in these areas and you have poor credit, you have one less thing to worry about.

To give you a better understanding of how poor credit impacts auto insurance rates, let us look at some of the states and their average rates based on one report from CNN.  The price that you will have to pay is almost double. Below are five states with the highest premium increase for people who have poor credit:

  • Arkansas: 110%
  • South Dakota: 109%
  • Nebraska: 108%
  • Wisconsin: 105%
  • Utah: 104%

More so, it will also help to look at the rates of top insurers to give you a picture of how poor credit affects your premiums. The largest insurance company in the country is State Farm.  On average, the annual premium for people with an average credit score is $1,315, On the other hand, drivers with poor credit can expect to pay up to $2,862, which represents an increase of 118%.

Geico is another top car insurer in terms of market share. Their annual rate for drivers with average credit is $1,919. If you have bad credit, your annual premium will increase by as much as 37%, which translates to an annual premium of $2,620.

Meanwhile, one of the companies offering the lowest percentages of increase is Nationwide. Average credit drivers can expect to pay a premium of $2,127. Those with poor credit, on the other hand, will pay an annual premium of $2,698. This is an increase of only 27%.

It should also be noted that while poor credit can impact car insurance rates, getting a quote for new policies will not influence your credit score. If you are applying for a loan, lenders will look at your credit report. This will constitute a nominal deduction in your credit score. However, the same deduction does not apply when it comes to car insurance.

Other Factors That Affect Car Insurance Rates

When looking for car insurance that suits your needs, look beyond your credit rating. Yes, it has a role to play, but it is not the only thing that matters. Age is one of the most important. Teen drivers are perceived to be at a higher risk, which makes their premiums more expensive.

Your driving history is also crucial. Your past is believed to be an accurate predictor of your future behavior. Hence, if you have a long history of violations and accidents, your premium is likely to be high to minimize the potential loss to the insurer from the claims you are anticipated to file.

Location is another fundamental factor that dictates car insurance premiums. Your state and zip code are the culprits for higher rates. For instance, if you live in Michigan, all drivers should have personal injury protection coverage, which can increase the premiums.

How to Get Better Rates Despite Poor Credit

A poor credit score can be disheartening. You might think that the world is unfair because of its consequences. Nonetheless, that is how things work and companies are just protecting them from losses. It isn’t the end of the world. If you have poor credit, here are some of the best things to do to get the best insurance rates possible:

1. Fix Your Credit Report

If you have poor credit but you believe that the details are inaccurate, you can file a dispute. The credit reporting bureau could have made an error. Also, you might need to work with a credit repair agency if you want to correct the misrepresentations in the report.

2. Ask for Discounts

Negotiate for cheaper car insurance if you have poor credit. One thing that you can do is apply for a bundle. For instance, you can get home and auto insurance from the same company with the hope that they offer a discount.

3. Prove that you are a Good Driver

Some companies will have usage-based insurance rates. They use technologies to assess your driving behaviors. In turn, it will give them a snapshot of how likely you are to file a claim in the future. If the assessment shows that you are a responsible driver, you might be able to qualify for more reasonable rates despite having poor credit.

4. Consider a Cheaper Car

Expensive cars demand higher premiums. Repairs in case of collisions will be more expensive if you are driving a high-end vehicle. If you have poor credit and you want cheaper insurance rates, it could be worth it to drive a more practical car instead.

5. Qualify for a Reconsideration

Depending on the policies of the insurance company, you might qualify for premium reconsideration. This means that they can give your rate a second thought even if you have poor credit. This is especially the case if you have experienced extraordinary life circumstances, which resulted in your not-so-favorable credit standing. Examples of such would be divorce, death of a spouse, military deployment abroad, involuntary loss of employment, and catastrophic events that have been declared by the government.

6. Compare Insurers

Do not immediately settle for the first quote that you are given. Look for at least three to five companies and compare their rates. Go online and read reviews from other people. You might find companies that are known for working with drivers who have poor credit.

In Closing

Based on studies, people with poor credit are more likely to file an auto insurance claim. No wonder, if you have a bad credit score, insurers will perceive you as a higher risk. In turn, this could translate to higher premiums.

Sandra Johnson

Sandra Johnson

Sandra Johnson was a few years out of school and took a job as a life insurance agent in California, selling coverage door-to-door for Prudential. The experience taught her about the technical components of insurance and its benefits for individuals and society, as well as the misunderstandings people often have about insurance. She has over ten years’ experience in the insurance industry, having worked as both a Broker and Underwriter, assisting clients across a broad range of industries. At Insurance Noon, Sarah diligently gathers all the required information and curates up pieces to provide meaningful insurance solutions. Her personal value proposition is to demonstrate a genuine interest in always adding value for clients.Her determined approach to guiding clients has turned her into a platinum adviser to multiple insurers.