Most people know a bad credit score means higher interest rates on loans. What catches them off guard is discovering it also jacks up their car insurance premiums - sometimes by 50% or more. Insurers in most states use credit-based insurance scores to set rates, and if yours is low, you're paying a penalty even if you've never filed a claim.
The logic sounds backwards at first. What does paying bills late have to do with car accidents? According to insurance companies: everything. Their data shows people with lower credit scores file more claims on average. Whether that's correlation or causation is debatable, but insurers price policies based on it regardless. Someone with excellent credit might pay $1,200 per year while someone with poor credit pays $1,800 for identical coverage.
The score insurers use isn't your regular credit score. It's a specialized insurance score that weighs factors differently. Payment history matters most - late payments and collections hurt you badly. Credit utilization (how much of your available credit you use) comes second. Length of credit history and new credit applications round it out. Bankruptcies and foreclosures can keep your insurance score suppressed for years.
Not all states allow credit-based insurance scoring. California, Hawaii, and Massachusetts banned the practice. If you live elsewhere and have damaged credit, two strategies help: First, shop around aggressively. Different insurers weigh credit differently, and some care less than others. One company might quote you $2,000 while another offers $1,400 for the same person and coverage.
Second, work on your credit while you shop. Even small improvements - paying down one credit card, catching up on a late utility bill - can bump your insurance score enough to drop rates. Some people see 10-20% reductions after six months of credit repair. That $1,800 premium becomes $1,500, then $1,400. The money you save pays for the effort several times over.