Does my credit score affect my car insurance rate?

Key takeaways

• In many states, insurers use your credit history to help determine car insurance rates.
• Pay your bills on time and keeping debt low may lead to lower car insurance premiums.
• Knowing how credit affects insurance costs gives you more control over what you'll pay for coverage.

What is a credit score?

A credit score is a number, usually between 300 and 850, that's a summary of your financial habits.The higher your score, the more confidence companies will have in you, knowing that you'll pay back what you borrow.

What makes up a credit score?

When it comes to a credit score, there are four key habits that demonstrate to lenders just how you handle money.

1. The biggest factor is your payment history. If you have been paying bills on time, it shows that you're dependable.
2. Next is credit use or how much of your available credit you spend. Keeping balances low works in your favor.
3. The length of your credit history matters, since a longer track record builds trust with lenders.
4. Having a healthy mix of accounts (such as credit cards, loans, or mortgages) is also helpful. Keep in mind that applying for too many new accounts at once could cause your credit score to take a dip.

Why does my credit score matter?

Your credit score acts like a key that can unlock financial opportunities. A higher score can help you qualify for lower interest rates on car loans and mortgages, get better credit card limits and rewards, and make renting a home or apartment easier. It can even improve your chances with certain employers and lower the cost of your home or auto insurance.

Do credit scores affect car insurance?

In many states, yes. Insurance companies often use something called a "credit-based insurance score" when deciding how much to charge for car insurance. This isn't the same as the credit score lenders use but it's based on similar information, such as your history of paying bills and how much debt you have. Some insurers use credit-based insurance scores to predict how likely someone is to file a claim. If you have a strong credit score, you may qualify for lower car insurance premiums, while a weaker score could mean higher rates.

3 U.S. states where credit scores can't factor into insurance rate

California, Hawaii, and Massachusetts prohibit insurers from factoring credit scores into auto or homeowners policies. In these states, premiums are based on things like your driving record or claims history instead of your financial habits.

Maryland, Michigan, Utah, and Oregon don't ban credit use entirely, but places strict limits on how insurers can apply it when setting coverage costs.

Does paying car insurance build credit?

No, paying your car insurance doesn't build your credit score because insurance premiums aren't reported to credit bureaus the way loan or credit card payments are. While your credit score may affect how much you pay for coverage (depending on the state you live in), making on-time insurance payments won't raise it. What does help to improve your credit score is when you consistently pay debts such as credit cards or mortgages on time.

How to get the best car insurance rate

If your credit score isn't perfect, you can still take steps to get affordable auto insurance coverage.

The best place to start is by shopping around. Because insurers weigh credit scores differently, comparing quotes from at least three different auto insurance companies is a smart way to find coverage that best fits your current budget.

Try to focus on factors you can control, such as maintaining a clean driving record, avoiding accidents and tickets, and bundling your auto policy with home or renters insurance for discounts. You can lower costs by selecting a higher deductible, driving fewer miles, or asking about special discounts for things like safe driving apps or completing a defensive driving course.

It's also smart to take steps for improving your credit over time, since stronger credit can unlock better rates in the future. A good way to accomplish this is to pay bills on time, reduce debt, and limit new credit applications.