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Why Your Credit Matters for Car Insurance
Many drivers are surprised to learn that their credit history can influence their car insurance premiums. Insurers in many states use credit-based insurance scores—a metric derived from your credit report—to help predict the likelihood of filing a claim. While controversial, this practice is legal in most of the US and can significantly affect how much you pay for coverage.
A strong credit-based score can lead to lower rates, while a poor one may result in higher premiums, even if you have a clean driving record. The good news is that improving your insurance score doesn’t require gaming the system or cutting ethical corners.
By adopting responsible financial habits—like paying bills on time, reducing outstanding debt, and monitoring your credit report—you can gradually boost your score and potentially lower your insurance costs.
This guide will explain how credit-based insurance scores work and why they matter. It will also provide actionable, ethical strategies for improving your score and securing better insurance rates.
What Is a Credit-Based Insurance Score?
A credit-based insurance score differs from the standard credit score you might check before applying for a loan. Instead, it is a specialised calculation designed by insurance companies to predict the likelihood that a customer will file a claim.
While traditional credit scores measure overall creditworthiness for borrowing money, insurance scores emphasise behaviours statistically linked to insurance risk.
Factors such as payment history, outstanding debt, and credit utilisation levels feed into the calculation. Unlike a general credit score, the purpose of this score is not to determine whether you are a good borrower but whether you are more likely to cost the insurer money through claims.
These scores are legally permitted in most states but are restricted or banned in California, Hawaii, Massachusetts, and Michigan. In those states, insurers must rely solely on driving records, claims history, and other risk factors when setting premiums. For everyone else, credit-based scoring remains a major influence on car insurance costs.
Read related blog: How Your Credit Score Impacts Car Insurance Rates
How Credit-Based Insurance Scores Affect Premiums
The impact of a credit-based insurance score on your premiums can be significant. Research has shown that drivers with poor credit may pay 50–70% more than those with excellent credit, even when both groups have identical driving histories.
Insurers defend this practice by pointing to studies showing that credit behaviour correlates with the frequency and severity of claims.
Consider a typical example: a driver with excellent credit might pay $1,200 per year for full coverage, while a driver with poor credit could face $2,000 or more premiums. The higher costs reflect the insurer’s calculation of greater financial risk. This is why two drivers with nearly identical personal and driving profiles can see such different rates due to variations in their credit standing.
Key Factors That Shape Your Insurance Score
Financial behaviours influence your credit-based insurance score, shaping how insurers assess your risk. Understanding these key factors, from payment history and credit utilisation to account age and credit mix, can help you take control and improve your overall insurance costs.
Payment History – Late Payments Raise Risk
One of the most important components is payment history. Missed or late payments can damage your insurance score, signalling to insurers that you may be a higher-risk customer. Consistency and reliability in paying bills on time strengthen your profile and build trust with insurance providers.
Credit Utilization – High Balances vs Available Credit
Your credit utilization ratio and how much of your available credit you use also carry weight. Using a large percentage of your credit limit suggests financial strain, which insurers may interpret as a greater likelihood of filing claims. Keeping balances low relative to credit limits is a positive indicator.
Length of Credit History – Older Accounts Help
The age of your accounts contributes to stability. Longer credit histories show insurers a proven track record of managing debt responsibly. Closing old accounts unnecessarily can shorten your credit history and reduce your insurance score.
New Credit Applications – Too Many Can Hurt Score
Each new application that triggers a hard inquiry slightly lowers your score. Multiple inquiries within a short period can suggest financial instability, which insurers may view negatively. Limiting new applications helps protect your insurance score.
Types of Credit – Diverse Credit Mix Is Positive
A healthy mix of credit types, such as credit cards, instalment loans, and mortgages, demonstrates responsible management of different financial obligations. A diverse portfolio signals balance and stability, favouring traditional and insurance-specific scoring models.
Read related blog: Does My Credit Card Cover Rental Car Insurance? Explained
Ethical Ways to Improve Your Credit-Based Insurance Score
Improving your credit-based insurance score doesn’t require shortcuts; it comes from practising sound financial habits. By focusing on consistent bill payments, responsible credit use, and regular monitoring, you can strengthen your profile ethically, leading to lower insurance premiums and long-term financial stability.
Pay Bills on Time
Paying bills promptly is the most reliable way to improve your credit and insurance scores. Consistent, on-time payments demonstrate financial responsibility and help build long-term credibility with insurers.
Lower Credit Utilization
Aim to use less than 30% of your available credit limit. Paying down credit card balances and avoiding excessive reliance on revolving credit can improve your standing and reduce the perception of financial risk.
Avoid Unnecessary New Credit
Applying for multiple credit cards or loans quickly can hurt your score. Only apply for new credit when necessary, and plan your applications carefully to avoid unnecessary inquiries.
Maintain Older Accounts
Keeping older accounts open helps extend your credit history, which is good. Closing long-standing accounts, even rarely used ones, can shorten your record and reduce your score.
Monitor Credit Reports
Check your credit reports regularly for errors that could unfairly lower your score. Mistakes such as incorrect late payments or duplicate accounts can be disputed and corrected, often resulting in improved scores and more favourable insurance rates.
Read related blog: First-Time Car Buyer? Car Insurance Tips No One Tells You
Alternatives If Your Credit Is Low
Affordable car insurance options remain if your credit isn’t where you want it to be. Not all insurers weigh credit the same way, and shopping around can reveal substantial differences in how companies calculate premiums.
In some states, insurers offer policies that do not use credit, allowing drivers to secure fairer pricing. Another option is telematics or usage-based insurance programs, where rates are determined by your driving behaviour rather than your financial history.
These programs use mobile apps or devices installed in your car to monitor factors like speed, braking, and mileage, often rewarding safe drivers with lower premiums.
Beem can help identify insurers that place less emphasis on credit scores and highlight alternatives such as telematics plans, ensuring you can still find coverage that fits your budget.
Read related blog: Do Credit Unions Offer Car Insurance?
State Rules on Credit-Based Insurance Scores
Laws governing the use of credit-based insurance scores vary widely. Four states, California, Hawaii, Massachusetts, and Michigan, ban their use entirely. In these states, insurers are prohibited from factoring credit into premium calculations.
Other states may limit the influence of credit scores or impose restrictions on when they can be considered. Because the rules differ, checking local regulations before assuming how your credit will affect your rates is important. Staying informed about these laws ensures you know your rights and can make the best choices when shopping for coverage.
How Beem Helps You Save Despite Credit Challenges
Navigating car insurance pricing can feel overwhelming, especially if your credit is less than perfect. This is where Beem provides valuable support. The platform compares quotes across multiple insurers, identifying companies that offer competitive rates even for drivers with lower credit scores.
By highlighting insurers that weigh credit differently or offer alternative models such as usage-based coverage, Beem empowers drivers to find affordable options that reflect their real needs rather than just their credit history.
With tailored recommendations, the platform makes it easier to save on car insurance and secure reliable protection. See how Beem can help you find affordable car insurance, no matter your credit.
FAQs – Credit and Car Insurance
Is my insurance score the same as my credit score?
No. While both rely on similar financial data, an insurance score is specifically designed to predict insurance risk, whereas a credit score measures borrowing reliability.
Can my insurer deny coverage based on poor credit?
In most states, insurers cannot outright deny coverage due to poor credit, but they can charge significantly higher premiums based on the risk your credit profile presents.
How fast can improving my credit score lower my premiums?
Improvements in your credit can begin impacting your insurance score within a few months, depending on when insurers recalculate rates. However, major benefits are often seen over six to twelve months of consistent improvement.
Do all insurers use credit-based scoring?
Not all insurers rely on credit scores. Some places put more emphasis on driving history or offer programs that evaluate actual driving habits. Shopping around is key to finding the right fit.
Which states ban or restrict credit-based insurance scores?
California, Hawaii, Massachusetts, and Michigan ban their use. Other states may impose restrictions, so reviewing your state’s laws before purchasing coverage is important.
Conclusion – Drive Toward Better Rates the Right Way
Credit-based insurance scores have become influential in determining car insurance premiums, but are not the only element insurers consider.
By adopting ethical financial habits such as paying bills on time, lowering credit utilisation, and monitoring credit reports, drivers can gradually improve their insurance scores and reduce costs. For those with lower credit, alternatives like shopping across insurers or exploring usage-based insurance can help level the playing field.
Beem provides a powerful tool for comparing options, connecting drivers with the most affordable coverage tailored to their circumstances. Download the app now!
