Good credit means a better car insurance rate

Credit is a main ingredient of the secret sauce used in your insurer's pricing formula. The better your credit, the better your insurance rate.

Brendan McDermid/Reuters
Standard and Poor's building in New York, in this August 2, 2011 file photo.

If you want to save on car insurance, it pays to take a hard look at how you use credit. In most states your credit history affects how much you pay for car insurance, and in some states your credit history has more impact than your driving record.

A NerdWallet sampling of car insurance quotes found that insurance rates on average are higher for good drivers with poor credit than for poor drivers with excellent credit, mirroring findings in a nationwide study released in July 2015 by Consumer Reports.

Although you’ll never know the secret sauce of your insurer’s pricing formula, you can bet that credit is a main ingredient unless you live in California, Hawaii or Massachusetts, where insurers aren’t allowed to use credit history for calculating car insurance rates. Understanding this is the first step toward saving money.

Take credit seriously — your car insurance company does

NerdWallet looked at rates in three states and found that having poor credit more than doubled average insurance quotes in Florida and South Carolina and increased prices by 76% on average in Ohio, compared to drivers with excellent credit.

By comparison, a DUI conviction increased rates by just 35% to 74% on average, depending on the state.

State Avg. rate with excellent credit Increase for average credit Increase for poor credit vs. excellent credit Increase for a DUI, excellent credit
Florida $581 37% 118% 74%
Ohio $378 28% 76% 35%
South Carolina $483 34% 123% 61%
Methodology: NerdWallet averaged rates from Geico, Progressive and State Farm in each state. Rates are for 30-year-old men and women driving a 2010 Toyota Camry with liability coverage at state minimums: 10/20/10 in Florida and 25/50/25 in Ohio and South Carolina, with $50,000 in PIP. Your own rates will be different.

Consumer Reports, which gathered 2 billion car insurance quotes from 700 insurance companies in every U.S. ZIP code, also found that poor credit led to higher rates than did a DUI conviction in many states.

Drivers with poor credit aren’t the only ones to pay more. NerdWallet’s analysis found that having only average credit instead of excellent credit increased car insurance quotes by 28% to 37% in the states we studied.

Consumer Reports found that single drivers with only “good” credit pay $68 to $526 more per year, on average, than similar drivers with the best credit, depending on the state.

Understand your insurance score

To use credit for pricing car insurance, insurers check your credit-based insurance score, a different number than the credit score lenders use.

While a credit score is used to predict whether you’ll pay off a loan on time, an insurance score is used to predict whether you’ll file a claim. Insurance companies say their data show that a driver with poor credit is more likely to file a claim than a driver with excellent credit.

Firms such as FICO, LexisNexis and TransUnion calculate the scores for insurance companies based on your credit history, and some insurance companies use their own formulas to create scores.

Consumer Reports says the insurance industry creates proprietary scores by “cherry-picking” roughly 30 of almost 130 details in credit reports. An insurance score is  “very different from the FICO score you might be familiar with, so that one can’t be used to guess the other reliably,” says Consumer Reports.

How to raise your insurance score

Here’s what FICO says are the most important things you can do to improve your insurance score:

  • Pay all your loans and credit card bills on time. Payment history is the most heavily weighted element of a FICO insurance score, accounting for 40% of it. Pay at least the minimum due on credit cards every month. Late payments and accounts sent to collections hurt your score, as do financial judgments against you, bankruptcies and wage attachments. The number and amounts of past-due obligations are considered as well as how late the payments are. Basically, the later the payments, and the more you owe past the due dates, the lower your score.
  • Keep credit card balances low. How much you owe relative to your credit limits is the second-most important factor FICO considers, accounting for 30% of your insurance score. If you’ve spent close to your credit card limits, make reducing debt a priority. Watch your spending and pay off as much as you can each month to bring down the balances.
  • Open new credit accounts sparingly. Opening too many accounts can hurt your score. That means you might save more in the long run by declining a new retail credit card offer, for instance, even if filling out the application means an immediate discount at the cash register. The pursuit of new credit accounts for 10% of your score.

The length of your credit history accounts for 15% of a FICO insurance score, and the type of credit you use — personal loans or credit cards — accounts for 5%. However, most states generally require insurance companies to consider applicants with little or no credit history as average risk, or to consider their lack of credit history a neutral factor. Some states restrict insurers from considering the types of credit you use as an element in an insurance score.

The National Association of Insurance Commissioners has more information about credit and insurance.

Check your credit report for errors

Mistakes on your credit report can hurt you. Make sure your insurance score is based on accurate information. You can order free copies of your credit reports from the major credit reporting bureaus once a year from If you find mistakes, follow the appropriate bureau’s online instructions for getting the misinformation corrected.

Finally, remember to shop around and compare car insurance quotes. Insurance companies vary in how heavily they weigh credit and other factors, and quotes can vary by hundreds of dollars a year. NerdWallet’s car insurance comparison tool can help you get started.

Barbara Marquand is a staff writer at NerdWallet, a personal finance website.

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