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Most people understand that credit scores affect their mortgages, car loans, and credit card approvals. What surprises many drivers is that their credit score can also directly affect how much they pay for car insurance. A good credit score can lead to hundreds of dollars in savings each year for some drivers. For others, a lower score can mean premiums that feel unfairly high. Do you know how your credit score impacts car insurance rates?
This blog explores the relationship between credit scores and car insurance rates. You’ll learn why insurers use credit, how much it affects premiums, which states allow or ban it, and—most importantly—what you can do to lower your costs even if your credit isn’t perfect.
Why Do Insurers Look at Credit Scores?
The Concept of Credit-Based Insurance Scores
Insurers do not always use your traditional FICO or VantageScore directly. Instead, they use a credit-based insurance score (CBIS). This score is derived from many factors that affect your credit score—payment history, credit utilization, length of credit history, and more—but it is specifically designed to predict insurance risk.
Whereas your FICO score predicts the likelihood that you will default on a loan, your CBIS predicts the likelihood that you will file an insurance claim. Insurers argue that this information helps them set fair prices for each driver.
Correlation Between Credit and Risk
Studies over decades show that drivers with lower credit-based insurance scores tend to file more claims, and the claims they file are more expensive. Whether this correlation is fair is hotly debated, but the data is clear: insurers believe that credit is a reliable predictor of risk.
For example, a driver with excellent credit may be less likely to file small claims and more likely to pay for minor repairs out of pocket. A driver with poor credit, statistically speaking, may file claims more often. Insurers use this reasoning to justify premium differences.
The Controversy
Critics argue that using credit scores penalizes people who are already struggling financially. Someone who loses their job and falls behind on bills could see their insurance rates rise, even if they have a spotless driving record. Consumer advocates believe this practice is unfair and want it banned nationwide.
States Where Credit Scores Can and Cannot Be Used
States That Ban or Restrict Use of Credit Scores
Not every state allows insurers to use credit scores in rate-setting. As of 2025:
- California, Hawaii, and Massachusetts: Insurers cannot use credit history to set auto insurance rates.
- Michigan: Restrictions are in place that limit how insurers can weigh credit in rate calculations.
In these states, premiums are based primarily on driving history, age, vehicle, and location—not credit.
States Where It’s Still Common Practice
In most US states, insurers are free to use credit as part of their pricing model. This means that your credit score is one of the key factors determining your premium.
The Legal Landscape in 2025
Several states are considering legislation to ban or restrict the practice. At the federal level, lawmakers have debated whether to standardize rules across all states. The reality is patchwork: in some states, credit matters a lot; in others, it doesn’t matter.
How Exactly Does Credit Score Impact Your Premium?
High Score vs. Low Score Example
Let’s take two hypothetical drivers:
- Driver A has excellent credit.
- Driver B has poor credit.
Both drivers are the same age, live in the same ZIP code, and drive the same vehicle. Despite identical driving histories, Driver B could pay hundreds or even thousands more annually simply because of credit differences.
In some states, the premium gap between “excellent” and “poor” credit can exceed $1,500 annually.
Insurance Score Tiers
Insurers often divide customers into tiers based on their credit-based insurance score:
- Excellent
- Good
- Fair
- Poor
Moving up one tier—even without hitting “perfect” credit—can lead to noticeable savings.
Other Factors That Work Together
It’s important to remember that credit is not the only factor insurers use. Your driving history, claims history, vehicle type, location, and annual mileage all play roles. Credit is simply one more data point in a larger picture.
Why This Matters More in 2025
Rising Premiums Across the US
Car insurance premiums have risen significantly in recent years. Inflation, supply chain challenges, and higher labor costs have all increased repair costs, which insurers have passed onto consumers at higher rates. In this environment, every factor—including credit—matters more.
EVs and High-Tech Cars
As more Americans buy electric vehicles and high-tech cars loaded with advanced safety features, the cost of repairs has risen. Replacing a bumper with embedded sensors or repairing an EV battery can cost thousands. Insurers lean heavily on predictive tools, including credit, to manage this risk.
Greater Emphasis on Personalized Pricing
In 2025, insurers are moving toward hyper-personalized pricing. Telematics (tracking driving behavior), location data, and credit scores combine to produce individualized premiums. This means your personal habits and credit history matter more than ever.
How to Improve Your Credit and Lower Your Car Insurance Rates
Pay Bills on Time
Your payment history is the most significant factor in your credit score. Late or missed payments can quickly drop your score, which may, in turn, raise your insurance premiums. Setting up automatic payments or reminders can help ensure bills are paid on time.
Reduce Credit Utilization
Credit utilization—the ratio of your balances to your credit limits—also plays a big role. Aim to keep your balances below 30 percent of your available credit. Lower utilization can boost your score and, over time, lower your insurance costs.
Check Credit Reports Regularly
Errors on credit reports are more common than many realize. Reviewing your credit reports at least once a year through AnnualCreditReport.com allows you to spot and dispute mistakes. Correcting an error can quickly improve your score.
Avoid Frequent Hard Inquiries
A hard inquiry is placed on your credit report whenever you apply for a new loan or credit card. Too many inquiries in a short time can lower your score. Be selective about applications.
Build Long-Term Credit History
The length of your credit history also influences your score. Keeping older accounts open—even if you don’t use them often—can help build a strong history and improve your score.
Alternatives if You Have Poor Credit
Shop Around Across Multiple Insurers
Not all insurers weigh credit equally. Some may place more emphasis on driving history, while others lean heavily on credit. Shopping around can reveal significant differences.
Focus on Clean Driving Record
A clean driving history is still one of the most powerful ways to keep premiums low. Avoiding tickets, accidents, and claims can offset the impact of a weaker credit score.
Enroll in Telematics or Usage-Based Programs
Telematics programs track driving behavior and reward safe habits with discounts. For drivers with poor credit, this can be a powerful way to reduce premiums regardless of score.
Consider Bundling Policies
Bundling auto insurance with home, renters, or other coverage can lead to discounts. These savings can soften the impact of a low credit score.
Use Smart Tools Like Beem
Beem, an AI-powered smart wallet app, helps drivers compare quotes, highlight coverage gaps, and find the most cost-effective policies. By identifying insurers that weigh credit less heavily, Beem can be especially valuable for drivers with poor credit.
The Debate Around Credit and Insurance in 2025
Consumer Advocacy Groups
Consumer groups argue that using credit scores in insurance pricing is discriminatory. They believe it punishes people for financial struggles unrelated to driving ability.
Insurer Perspective
Insurers argue that credit scores are among the most reliable predictors of risk. They claim that banning credit-based insurance scores would force them to raise rates for everyone.
Political and Regulatory Outlook
The debate continues in 2025. Some states are considering bans, while others defend the practice. At the federal level, lawmakers are divided. For now, the rules remain a patchwork, creating confusion for drivers who move between states.
Conclusion
Credit scores influence more than just loans—they can also shape how much you pay for car insurance. This means that your financial habits affect your monthly premiums. Improving credit scores, maintaining clean driving records, and using tools like Beem to compare insurers can significantly lower costs.
Beem, the personal finance app trusted by over 5 million Americans, provides a convenient platform for comparing car insurance quotes and discovering affordable rates tailored to individual needs. Take the first step towards securing reliable coverage with Beem. Download the app here.
FAQs for Credit Scores and Car Insurance Rates
Do all insurers use credit scores to set car insurance rates?
No. While most insurers use credit-based insurance scores in states where it is allowed, some insurers place more weight on other factors like driving history. A few companies specialize in working with drivers who have poor credit.
Can improving my credit score lower my premiums immediately?
Not always immediately, but improvements in your credit score can affect your premiums at your next policy renewal. Insurers typically recheck credit when setting renewal rates.
How is an insurance credit score different from a FICO score?
An insurance credit score is built on similar data but tailored to predict the likelihood of filing claims. It is not the same as your FICO score, though both tend to move in the same direction.
Do states that ban credit-based insurance scores have higher rates overall?
In some states that ban credit scoring, rates are spread more evenly across all drivers. Insurers may compensate by weighing other factors more heavily, such as location or age.
How does Beem help drivers compare and save if they have poor credit?
Beem simplifies the process by comparing policies across multiple providers, identifying insurers that rely less on credit, and highlighting opportunities for savings. For drivers with poor credit, this can make the difference between overpaying and finding an affordable policy.
