If you and your family are like 88% of American households, there’s a good chance that you own at least one car, which you use to drive to work each day, drop your kids at school, run errands, and hopefully, take an occasional weekend getaway. In much of our country, a car is an absolute life neccessity. 

Yet, the sad reality is that cars carry certain risks. Car accidents are a sad fact of life, costing thousands of lives, and hundreds of billions of dollars, every single year. To guard against these concerns, we purchase auto insurance. 

What Decides Your Insurance Rate

In deciding how much you will pay, insurers consider a variety of factors. These include how long you’ve been driving, your driving record, how many miles you drive each year, your gender (men are seen as riskier drivers), marital status (married drivers have been historically less accident-prone), geographic location (not surprisingly, chances of an accident or theft are higher in busy urban areas), and yes, your credit history.

Not all states allow consideration of your gender or credit history. However, most states allow the majority of these factors to be considered. 

Credit Scores & Insurance Rates: The Basics 

Why would your credit history be relevant in deciding your auto insurance rates? After all, driving a car, and making credit card or mortgage payments, seem to be two very different activities.

Yet, according to a report from the Federal Trade Commission (FTC), insurers have found a connection between things like credit card debt, payment history, length of credit, and the frequency (and dollar amount) of accident claims filed by consumers. As a result, insurers in every state, except for California, Massachusetts and Hawaii (where credit data is barred from use in auto insurance decisions), utilize credit history and scores, to figure out what sort of premium ought to be charged. 

Two companies primarily offer insurance credit scores: FICO (which provides credit scores that are used for mortgage, credit card, and auto lending decisions), and ChoicePoint. FICO insurance scores can range from 300 to 900 (unlike FICO’s other credit scoring models, which only go up to 850), while ChoicePoint scores vary from 300 to 997. 

How Credit Scores Impact Auto Insurance Rates 

How much does your insurance credit score impact what you pay for insurance? In 2015, Consumer Reports published a report which found that drivers who had a good (as opposed to great) insurance credit score, ended up paying from $68 to $526 more per year (on average) than a driver who was comparable in every other way, but had the “best” credit scores. 

Those with poor credit ended up facing staggering costs. In Texas, a driver with a poor credit score paid $2088.00 more than someone who had excellent credit. In New York, such a driver paid $1759.00 more. 

Additionally, in most states where credit is used to calculate auto insurance rates, a driver with poor credit ended up paying more for insurance than someone who had an excellent insurance credit score, but also a conviction for driving while under the influence of alcohol (DWI). 

Let that sink in. A bad credit score (but no drunk driving) is more harmful to your insurance rates, than being convicted of driving a machine that weighs over 3000 pounds, after having consumed excess alcohol (a cause of countless auto accidents and deaths, every single year), if the person who was driving drunk otherwise has very strong credit. 

Here’s a picture of average yearly insurance rates in Texas:

And here’s another one for New York:

Clearly, if you have anything less than excellent credit history, you are spending hundreds, possibly thousands of dollars, unnecessarily. What can you do about this? 

How To Maximize Your Insurance Credit Score 

While the actual formula and exact factors used to calculate insurance credit scores remains secret, we do have a good idea of what counts towards your insurance score. According to Nationwide Insurance, the main factors are your payment history (any late payments, delinquencies or chargeoffs are likely to be extremely harmful here), the length of your credit history, and the types of credit you have (i.e. credit cards, or auto loans). 

Progressive Insurance also cites some of these factors, as well as having a relatively low utilization of one’s credit accounts (i.e. staying well below your credit limit), and not applying for credit too often (i.e. . Consumer Reports additionally says that retailer and department-store credit cards can be a negative factor in one’s insurance credit score.

In order to maximize your insurance credit score, it is important to actually have credit accounts (i.e. a few open credit cards, and possibly other accounts like auto loans or mortgages, as well), and to always make payments on time. Fortunately, if you don’t have much (or any) credit history, you can start building good credit pretty easily.    

Avoid high balances on your credit cards (below 30% of your limit is ideal). If you’ve had an account open for several years (especially a credit card), you should keep the account open, and use the card at least occasionally, so that the age of your accounts continues to increase, boosting your insurance credit score. If you already have negative items on your credit report, especially late payments, charged offs or collections accounts, it makes sense to try to have those items removed from your credit report, as they can have a massive negative impact on your overall score. 

The Final Word 

On the road, bad things sometimes happen. Even the best drivers get into accidents. We can choose to develop excellent driving habits, but what happens on the road isn’t completely within our control. The same is true of our age, gender, and even our marital status, and where we live. This means that the cost of our auto insurance isn’t entirely up to us.

Yet, in the long run, building a great credit score is something each of us can do. We can keep our debts low, and maintain several credit accounts, and pay them all on time. If we make mistakes with our credit, we can have them cleaned up. By taking these positive steps, over the years, we can save thousands of dollars on auto insurance – starting today.