Does My Car Insurance Affect My Credit Score?

Bank Overdrafts

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Getty Images

Overdrawing your bank account can get expensive, especially if you have multiple overdraft transactions in a short period of time. Fortunately, those overdrafts won’t hurt your credit score as long as you clear them up before they go to collections.

However, if your account remains overdrawn for several weeks and your bank ends up sending your account to a collection agency, your credit score will take a hit. This is because of the debt collection stemming from the overdrafted account, not the overdraft itself. The same goes for closing a bank account. 

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Frequently asked questions

Every major car insurance company checks your credit before offering a binding quote. That includes Geico, State Farm, USAA, Progressive, Allstate and Liberty Mutual. Only a few insurers do not check your credit.

Yes. A higher or lower credit score can have a significant impact on your insurance rates. Bad credit increased annual rates by 61% in our study.

Getting an auto insurance quote does not affect your credit. Car insurers check your credit with a soft pull, which does not provide a full credit history and does not impact your score.

Getting car insurance and the mechanics of your coverage should not affect your credit. If you miss payments, the insurance company might report that to credit agencies.

No. Changing insurers does not have any effect on your credit score.

What Are the Types of Credit Inquiries?

There are two types of credit inquiries:

  • Soft Pull: A soft pull is also called an involuntary inquiry. It’s used when creditors send potential customers preapproved offers and when potential employers check job applicants’ credit history. Checking your own credit score is also considered a soft pull because you aren’t actively seeking credit. It has no effect on your credit score.
  • Hard Pull: A hard pull is voluntary, which means you asked for the credit check because you are applying for credit. You complete an application giving a lender permission to run a credit check, and they use the information to decide whether to approve your credit application and determine its terms. A hard pull indicates you’re actively shopping for credit, and it will be visible to other lenders. Too many hard pulls are bad for your credit score.

How Long Can Bad Credit Affect My Car Insurance Rates?

Unlike traffic tickets that typically drop off your driving record and don’t affect rates after three to five years, a bad credit score can continually impact your car insurance rates.

As long as you have poor credit, your car insurance rates can be affected.

The best way to keep your credit from increasing your auto insurance premiums is to raise your score. Once you’ve successfully bumped your score higher, it’s a good time to compare car insurance quotes.

If you wait until your next renewal period to shop around, make sure to ask your current car insurance company to review your credit, as some only check for changes every few years if you are a long-time customer.

You should see your rates with your current insurance company improve as your credit score improves—but also take time to shop around. With a positive change in credit score, some other company may offer you cheaper rates and be a better overall fit for your needs.

Checking Your Own Credit

 baona/iStock
baona/iStock

You can check your credit report or score as many times as you’d like and your credit score won’t drop a single point as long as you check it through a reputable source, like AnnualCreditReport.com, the credit bureaus, FICO, or a legitimate third-party. However, having a lender check your credit score for you would appear as a hard inquiry, which would affect your credit score the same as an inquiry for a new application.

What happens if my car insurance is canceled due to nonpayment?

So what if my car insurance payment is late? What happens if you owe car insurance or if your car insurance is canceled due to non-payment?

If you don’t get a grace period or you let the extra time pass, your insurer will set up a cancellation for nonpayment. Nonpayment is one of the few reasons that your company can terminate your coverage when you are still within your policy period

A termination will lead to at least a small lapse in your insurance coverage.

If you have a lapse in coverage, it can affect your registration status and even your driving privilege.

When someone is caught driving without insurance, they can face misdemeanor charges. Multiple offenses can lead to a loss of your license. In most states, your vehicle registration is suspended once the DMV finds out your coverage lapsed.

Pay Your Auto Insurance Premiums

Having a good credit score is one of the ways that you can expect to pay less for your auto insurance premium because it shows that you are likely more responsible and a lower risk driver. If you receive judgments against you and are not able to take care of your financial responsibilities, your credit score will take a major hit.

The bigger impact on your credit score would be if you chose to not pay your auto insurance premiums and then were caught driving without insurance.

Could credit checks for auto insurance become illegal?

Advocates for consumers are seeking to outlaw auto insurance companies from using credit history to issue higher rates. Insurance Business Magazine reported U.S. Representative Rashida Tlaib (D-Michigan) introduced a bill that will prevent companies like insurance providers from charging higher rates for poor credit.

This video shows a news report on this bill and Tlaib’s view on credit history and auto insurance.

The bill was introduced in 2019 and has not made any significant strides just yet, but it could resurface in the years to come.

Not paying your car insurance can get you in big trouble with law enforcement and the DMV. Make sure you do your best to keep your coverage from lapsing.

If your policy has already lapsed, start shopping around for coverage right away.

Find a low-cost option by comparing online quotes instantly, and then apply for the best product so that you have protection, regardless of your credit history. Compare auto insurance rates from multiple companies at once for FREE!

What Is a Credit Score?

Equifax explains that a credit score is a three-digit number indicating the likelihood that you will pay your bills and do so on time. The three main credit bureaus are Equifax, TransUnion, and Experian. These bureaus calculate your credit score based on your credit report, which includes:

  • Your payment history
  • Your debt
  • The length of your credit history

Different credit scoring models use different sets of data. Some models include your income to calculate credit scores, and others include how much of your available credit you use.

What are credit-based insurance scores?

Many auto insurance companies will use what is known as a credit-based insurance score to quickly and easily identify risk among policyholders. Auto insurance companies generally use this information to assess your risk and determine how likely you are to make timely payments or to file a claim.

“Credit-based insurance scores are a new way of calculating premiums,” comments Espenschied. “The most common credit score is the FICO score, and companies such as Fair Isaac Corp. use it to help calculate premium costs based on your driving history and risk assessment.”

A credit-based insurance score reviews your credit report to assess your risk in simple numerical form. This is usually a strictly credit-based identifier, so it does not include your current employment, income history or other personal details. Instead, it sticks mostly to your payment history and considers your total debt when assigning a score. An insurance company then translates that score into a metric of its own so that customer service agents cannot see your actual credit score.

What is an extraordinary life circumstance?

At Nationwide we value our customers. We have an extraordinary life circumstance process that applies in all states. If your credit information has been directly influenced by one of the following events, you may qualify for reconsideration of your premium.

  • Any catastrophic event declared by the federal or a state government1
  • Total or other loss that makes your home uninhabitable1
  • Divorce or dissolution of marriage
  • Death of a spouse, child or parent
  • Serious illness or injury, either to you or to an immediate family member
  • Temporary loss of employment for three months or more, if such loss is due to involuntary unemployment
  • Military deployment overseas

How Can I Lower My Car Insurance Rates Even with Poor Credit?

Poor credit doesn’t define you—it’s just one aspect of the whole package car insurance companies look at. There are ways to lower your auto insurance rates.

To get better rates even with bad credit, you can:

  • Ask for discounts. Don’t be shy with your agent or insurance company: Ask if there are any car insurance discounts you’re eligible for and not receiving. It may be as simple as going paperless or paying in full, or bundling your auto insurance with your home insurance, to get you discounts on your premium.
  • Show you’re a good driver. If you want driving factors to count more toward what you pay for car insurance, try signing up for a usage-based car insurance program. The insurance company will monitor your driving behavior. If you score well, you can get a discount of up to 40% with some providers.
  • Review your insurance policy. Your needs may have changed since you started your car insurance policy, so check it over. If you have an older car and don’t need collision and comprehensive coverages, you can take them off and save.
  • Comparison shop. This is the most vital tip. You won’t get the cheapest car insurance rates without shopping from multiple companies. Each insurer weighs rating factors, such as credit, differently, so shop around at least once a year to ensure you’re getting the best price.

The effect of NOT paying your car insurance

It’s also important to remember that, while paying your car insurance doesn’t build your credit score, failing to do so will actually bring it down if your payments are turned over to a collection agency. This type of report stays on your credit report for about 7-10 years, but the effects to your report can vary depending on your overall financial picture.

If you are late with your car insurance, utility bills, or other payments, they may eventually go to collections. When that happens, it can make a negative mark on your credit score. That can affect how easily you qualify for loans, credit cards, and other credit products. It can also have an effect on your next car loan — something to keep in mind if you think you might be in the market for a new car soon!

Average cost of insurance by state and credit rating

Not all states use your credit score as a factor to determine car insurance rates, but most do. California, Hawaii, Massachusetts and Michigan have banned the practice of using credit scores to calculate car insurance rates. Recently, Washington also banned the use of credit as a rating factor, although the current ban is only effective for three years (until 2024). Maryland, Oregon and Utah also limit the use of credit as an auto insurance rating factor. In these states, there are regulations limiting how and when insurance companies can use credit as a rating and underwriting factor.

Unless you live in these states, your credit score will likely have an impact on your auto insurance premiums. But because geographic location also plays a role, the state you live in and even your ZIP code will also impact your premium.

“States have varying insurance premiums for a variety of reasons,” Mak explains. “The incidence of crashes in some states is higher than in others. Impacts are due to the mix of the ability of drivers in the state as well as road safety. Each state’s premiums are also affected by the court system and the cost of medical care in each state, with some states’ courts offering more generous awards and higher-cost medical care being drivers of higher premiums.”

Depending on where you live, this is how your credit could impact your full coverage auto insurance premium:

State Poor credit Average credit Good credit Excellent credit
Alabama $3,108 $1,900 $1,623 $1,540
Alaska $2,265 $1,730 $1,559 $1,497
Arizona $2,804 $1,764 $1,547 $1,423
Arkansas $3,461 $2,146 $1,914 $1,660
California* $2,114 $2,114 $2,065 $2,114
Colorado $3,321 $2,213 $2,016 $1,679
Connecticut $2,967 $1,794 $1,845 $1,344
District of Columbia $3,072 $2,062 $1,855 $1,711
Delaware $2,987 $1,954 $1,775 $1,509
Florida $5,817 $3,032 $2,364 $2,161
Georgia $3,143 $2,200 $1,982 $1,859
Hawaii* $1,217 $1,216 $1,127 $1,216
Idaho $1,748 $1,217 $1,045 $1,019
Illinois $2,622 $1,653 $1,485 $1,243
Indiana $2,621 $1,480 $1,254 $1,099
Iowa $2,365 $1,408 $1,260 $1,087
Kansas $3,165 $1,924 $1,698 $1,521
Kentucky $4,128 $2,533 $2,128 $1,934
Louisiana $4,630 $3,032 $2,724 $2,410
Maine $1,425 $913 $965 $765
Maryland $2,935 $1,958 $1,877 $1,565
Massachusetts* $1,271 $1,271 $1,223 $1,272
Michigan* $6,209 $2,981 $2,309 $2,117
Minnesota $3,087 $1,822 $1,643 $1,445
Mississippi $2,685 $1,893 $1,782 $1,552
Missouri $2,829 $1,865 $1,661 $1,463
Montana $2,894 $1,913 $1,737 $1,560
Nebraska $2,862 $1,697 $1,531 $1,293
Nevada $3,275 $2,404 $2,245 $2,044
New Hampshire $2,174 $1,312 $1,275 $945
New Jersey $3,307 $1,979 $1,757 $1,384
New Mexico $2,534 $1,560 $1,419 $1,300
New York $4,876 $2,585 $2,321 $1,935
North Carolina $1,758 $1,451 $1,325 $1,352
North Dakota $2,388 $1,474 $1,264 $1,107
Ohio $2,075 $1,231 $1,034 $960
Oklahoma $3,024 $2,054 $1,873 $1,680
Oregon $2,288 $1,539 $1,346 $1,245
Pennsylvania $2,553 $1,791 $1,476 $1,507
Rhode Island $3,090 $2,132 $2,018 $1,664
South Carolina $2,775 $1,646 $1,512 $1,250
South Dakota $3,139 $1,896 $1,642 $1,422
Tennessee $2,416 $1,531 $1,338 $1,174
Texas $3,053 $2,106 $1,823 $1,663
Utah $2,369 $1,477 $1,306 $1,144
Vermont $1,873 $1,209 $1,207 $982
Virginia $2,300 $1,425 $1,304 $1,083
Washington* $1,816 $1,318 $1,176 $1,054
West Virginia $2,635 $1,741 $1,499 $1,355
Wisconsin $5,440 $1,345 $1,186 $1,010
Wyoming $2,357 $1,567 $1,495 $1,229

*These states do not allow insurance companies to use credit as a rating factor.

You may have noticed that Michigan and Washington still show quite a bit of variance in their rates. This is likely because the credit bans are recent; Michigan’s credit ban went into effect on July 1, 2020 and Washington’s temporary ban was effective on March 22, 2021. This means that there are still existing policies in place that were initially rated with credit score as a factor. Within a few years, these policies should all have renewed into the new credit-banned system and the rates should even out across the credit tiers.

Do insurance companies check your credit?

To get auto insurance, in almost every case, your credit will be checked. Every major auto insurer uses drivers’ credit history in some capacity, according to a 2007 report from the Federal Trade Commission.

There is a small number of insurers that don’t use credit history to set rates. California, Hawaii, Massachusetts, Michigan and Washington forbid the practice.

The reason insurers check your credit is because studies have shown that credit rating tends to be a good indicator of how many claims a driver will file. That allows insurers to match more expensive rates with drivers who will likely use their insurance more.

When an insurer asks for your Social Security number in the process of providing a quote, this is to check your credit. Some insurers provide quotes without an SSN, but they will ask for one before delivering a final price.

Other Ways To Build Credit

Making your car insurance payments on time and in full is important, whatever payment method you choose. 

Remember, you won’t build credit just by making your car insurance payments. But using a credit card to pay those insurance premiums can have an indirect impact. Just remember it’s the responsible use of your credit card that can have a positive effect on your credit score. 

But there are also ways you can build your credit, even without a credit card. Becoming an authorized user on someone else’s credit card account, applying for credit builder loans, and using personal loans responsibly may help improve your credit score. 

Can you get non-credit-based car insurance?

What if your credit isn’t the best. Then what? Does State Farm or Geico use credit scores? How do you know?

No credit check auto insurance is available, but most of the major insurers do check your credit. Every auto insurance company determines its rates a little differently. That’s why it’s so important to shop around. You can save hundreds by switching to a more lenient insurer.

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