Car insurance with bad credit: how credit-based insurance scores affect your price

What is a credit-based insurance score?

A credit-based insurance score is a number calculated partly or entirely from the information in your credit report. According to the National Association of Insurance Commissioners (NAIC), it is designed to estimate how likely you are to file an insurance claim, not whether you will repay a loan. FICO introduced these scores in the early 1990s, and they are now part of the pricing system at most auto insurers in states that permit them.

Insurers use the score in two places:

• Underwriting, which decides whether the company will offer you a policy and in which of its companies or tiers.
• Rating, which sets the price. Your score can move your premium up or down alongside your driving record, claims history, location, vehicle, coverage limits and deductibles.

An insurance score is not the same as the credit score a lender sees, even though both come from the same credit report.

What the FTC found about credit and car insurance

In July 2007 the Federal Trade Commission sent Congress a report on how credit-based insurance scores affect consumers of automobile insurance. It used policy data from five insurers that together held 27% of the US auto insurance market in 2000. Its main findings:

• Scores predict claims. Drivers with lower scores filed more claims, and their claims cost more in total.
• Scores differ by group. Scores were distributed differently among racial and ethnic groups, so the FTC concluded that their use likely leads African-American and Hispanic drivers to pay relatively more for auto insurance.
• Little proxy effect. The FTC estimated that only a small part of the scores' effect works as a stand-in for race or ethnicity: 1.1% for African Americans and 0.7% for Hispanics. Most of their predictive power came from something other than group membership.
• No easy fix. The FTC could not build an alternative model that predicted risk as well while narrowing the differences between groups.

Supporters of insurance scores point to the FTC's finding that scores predict losses; critics point to its finding that they raise prices for some groups more than others.

States that ban or limit the use of credit in car insurance

States, not the federal government, decide whether and how insurers may use credit. In a 2019 summary, the NAIC named 3 states that prohibit credit history in auto insurance underwriting or rating: Hawaii, Massachusetts and California. It added that practically every state limits the practice in some way. The NAIC says that in most states an insurer cannot use a credit-based score as the only reason to raise rates or to deny, cancel or refuse to renew a policy, and many states require a notice when credit played a part in an adverse decision.

Maryland's limits in detail

Maryland is a useful example of a state that allows credit but restricts it. According to the Maryland Insurance Administration, an insurer may use credit history to rate a new policy, but it may not:

• refuse to insure you, cancel or non-renew your policy because of your credit history;
• raise your renewal premium because your credit got worse;
• add a credit surcharge of more than 40%;
• rate you on having no credit history, on the number of credit inquiries, or on any factor more than 5 years old.

If your credit improves, it can help lower your premium at renewal, and you can ask your insurer to recheck your credit once per policy period.

Laws change. Your state insurance department can confirm the current rules where you live.

How much does bad credit raise car insurance?

No official source publishes a national figure, so we do not quote one. The effect depends on the insurer's rating plan, your state's rules and the rest of your profile. What is clear from the NAIC and the FTC is that, in states that allow it, credit can be a significant rating factor alongside age, location and driving record. Our credit score cost guide and the premium factors tool show how credit fits with the other factors insurers use.

Your rights when credit affects your price

Federal and state rules give you several protections when credit information leads to a worse outcome:

• Notice. When credit information contributes to an adverse decision, such as a higher price or a denial, you generally have the right to be told.
• Your report. You can get your credit reports free from each nationwide credit bureau every week at AnnualCreditReport.com, the only site the FTC says is authorized to fill those orders.
• Disputes. If a report contains mistakes, you can dispute them with the credit bureau and with the business that supplied the information.

How to get cheaper car insurance with bad credit

1. Check your credit reports. Look for accounts that are not yours, late payments that were on time and old debts that should have aged off.
2. Dispute errors. Fixing a mistake can raise your insurance score at the next re-rating.
3. Ask how your insurer uses credit. Find out whether it re-checks credit at renewal and whether you can ask for a new check after your credit improves.
4. Compare several insurers. Rating plans differ, so the weight given to credit varies from one company to the next. See shopping at renewal.
5. Lean on factors you control. A clean record, a telematics program, discounts and a sensible deductible can offset part of a credit surcharge.
6. Look at how you pay. Some insurers charge less when you pay in full or set up automatic payments. See payment options.
7. Build credit over time. Paying bills on time and keeping card balances low helps your credit report, and that eventually feeds into your insurance score.

If you have a low income and a good driving record, a state program may help. California's Low Cost Automobile Insurance Program offers basic liability coverage to income-eligible good drivers; see low-cost state programs.

When a life event hurts your credit

Critics of insurance scores, as the NAIC notes, argue that they may not reflect insurance risk after events such as serious illness, job loss or a wider economic shock. If a medical emergency, divorce or layoff damaged your credit, ask your insurer whether it will review your situation, and ask your state insurance department whether any exception applies in your state.