How Credit Affects Rates

Having a good credit score can be advantageous for you in many ways. You will be able to get better interest rates on credit products such as car loans, credit cards and mortgages. A good credit score can also benefit you greatly when it comes time to apply for car insurance, as it has the potential to give you lower premiums.

Auto insurance companies will take a variety of factors into consideration when they seek to determine how much you should pay for your insurance. These include your driving record, the area where you reside, as well as your age. All of these factors have a direct impact on how likely a customer would be to file a claim. Many car insurers will also take your credit rating into consideration when assessing the risk that you pose to them as a potential customer. Such an approach is not without controversy. Certain states, such as California and Massachusetts, forbid insurance companies from using an applicant's credit score when determining their auto insurance premiums, as these states feel that a person's credit score doesn't reflect how good (or how bad) of a driver they are. However, these states are in the minority and throughout most of the country, insurance companies are free to use your credit score to determine your rates for insurance. This explains why individuals with good credit histories have lower average auto insurance premiums.

Those who support the use of credit scores in determining auto insurance premiums will claim that one's credit score reflects whether the person is likely to take risks. They will argue that people with poor credit histories have made risky purchases they weren't able to pay for. Bankruptcies, high balances owed on credit cards and accounts sent to collections may be indicative of a personality that takes substantial financial risks, which could then lead one to take risks in other areas of life like driving.

Differences in auto insurance premiums between drivers who have a clean driving record and good credit, and those who have spotty credit and a bad driving history can be as high as 40% in some states. Thus, being a good driver with a good credit history can help you save a lot of money on your car insurance. You should also know that drivers with no credit history are also penalized quite severely, as insurance companies aren't able to fully assess their risk, and will therefore assign them higher rates.

There is some good news for those with bad credit. Other elements are taken into the equation by insurance companies and may result in lower rates. For example, the older you get, the more your rates will drop, as insurers will assume that drivers with more experience on the road are safer. You can also take steps to improve your credit score by managing your finances better. But if you already have a good driving history and a good credit score, then you should try to keep things that way, as it can let you save thousands of dollars on your car insurance over time.