Car Insurance and Your Credit Score

How your credit score, occupation, and education level affect what you pay.

Many car insurance companies now use your credit score to determine what you pay. Why? Because they say studies show that customers with poor credit histories are more likely to be in accidents and file claims. They claim that customers with bad scores are higher risks and it's only fair that those customers pay more for their policies.

Insurance regulations in many states now allow this practice, although regulatory administrators admit they don't understand the connection between credit scores and car accident claims.

It's easily possible that someone who has never had an accident and never filed a claim could pay up to three times as much for insurance as another similar customer with an identical vehicle — because of differences in credit scores.

How does it work?
Insurance companies use a secret formula to calculate a customer's "insurance score" that is not quite the same as the more familiar FICO score from credit reporting agencies such as Equifax , Transunion, and Experian. Although the score itself may be different, the end result will nearly always be the same. If a customer has a poor FICO score, he'll almost certainly have a poor insurance score.

Companies such as Allstate charge poor-credit customers as much as three times the rate for customers with excellent credit. In fact, credit history is becoming one of the major factors, if not the major factor, in determining insurance rates.

Insurance companies want us to see this as a discount for those with excellent credit and a penalty for those with poor credit. Those with average credit will pay normal premiums. They like to point out that people with outstanding credit scores will experience lower premium cost than before.

Some insurance companies such as Geico also use education level and occupation as additional factors in setting policy cost. In effect, a high-school educated supermarket clerk will pay more than a company president with a master's degree. Why? Again the companies point to studies and statistics that show how jobs and education affect customers' propensity to have accidents and file claims. This may seem a bit unfair — that those who are least able to afford higher rates are the ones who must pay them — but it's all about risk, and not affordability.

What can you do?
First, you should get a copy of your credit history and FICO Score . Check for mistakes and old outdated information. Some studies have shown that 8 out of 10 reports have errors. Obviously, anything you can to do improve your credit score will also improve your ability to get less expensive car insurance. Even if you have an average score, it will be worthwhile to make improvements. Since it takes time to change your credit history, don't expect short-term results.

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Additional information

Additional information about auto insurance can be found in the following articles:

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