How your credit affects car insurance rates

What is a credit-based insurance score?

A credit-based insurance score is a number calculated from the information in your credit report. Insurers use it to predict how likely you are to file insurance claims, not whether you will repay a loan. The NAIC describes it as a rating based in whole or in part on your credit information. Fair Isaac Corporation (FICO) introduced these scores in the early 1990s, and other companies make them too.

The NAIC says insurers may use the score only as one factor among several. It sits beside your driving record, claims history, location, vehicle and the others listed in our guide to car insurance cost factors.

Credit-based insurance score vs credit score

What goes into a credit-based insurance score

The NAIC, describing FICO's model, gives this breakdown of what counts:

Other scoring companies use their own models, so the weights can differ.

What an insurance score cannot use

According to the NAIC, a credit-based insurance score does not use:

• race, color, religion or national origin
• gender or marital status
• age
• income, occupation or employment history
• where you live
• the interest rate on your loans
• child or family support obligations or rental agreements
• certain inquiries on your credit report, such as account reviews, employment checks and promotional offers from credit companies
• taking part in credit counseling

Some of these details, such as age, marital status or location, may still be used elsewhere in a car insurance price where state law allows. They just cannot be inside the credit-based score.

Why insurers use credit, and the debate

In 2007, the Federal Trade Commission sent Congress a report on credit-based insurance scores in auto insurance. It found that the scores are effective predictors of risk under auto policies. It also found that scores are distributed differently among racial and ethnic groups, which likely affects the premiums those groups pay on average. The FTC said the scores get only a relatively small amount of their predictive power from being linked to race and ethnicity, and it could not build an alternative model that predicted risk well while narrowing the gaps between groups.

Critics argue that credit-based pricing penalizes people for financial hardship rather than for how they drive. That debate is why several states ban or limit the practice, and why the rules keep changing. The NAIC notes, for example, that Washington state ordered a temporary ban in 2022, but a state court overturned it before it took effect.

States that ban or limit credit in car insurance

The NAIC lists 8 states that ban insurers from using credit-based insurance scores to determine rates or to offer or renew a policy: California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon and Utah. The NAIC's list was last updated in January 2024, and laws change, so confirm the current rule with your state insurance department.

Other states allow credit but limit how it is used. The NAIC notes that some states:

• forbid using a credit-based score as the only reason to deny, cancel or rate a policy
• require insurers to tell you when credit information led to a worse price or decision

In California, auto prices must give the most weight to driving safety record, annual miles driven and years of driving experience. Credit-based insurance scores are banned there. If you have bad credit, this is one reason quotes can differ so much between states.

Your rights under the Fair Credit Reporting Act

Credit reports are covered by the federal Fair Credit Reporting Act (FCRA). The FTC explains that if an insurer turns you down or takes another unfavorable action because of your credit report, you will get a notice (often called an adverse action notice) that names the credit bureau that supplied the report.

You then have these rights:

1. Get a free copy of the report. You must ask within 60 days of getting the notice.
2. Dispute errors. Contact both the credit bureau and the company that supplied the wrong information. The bureau must investigate.
3. Get your regular free reports. Federal law entitles you to a free report from each nationwide bureau once every 12 months, and the bureaus now offer free weekly reports at AnnualCreditReport.com. The FTC says this is the only site authorized to fill these orders.

The CFPB also lists specialty consumer reporting companies that insurers use, such as claims history databases. Our claims history guide explains how to get those reports.

How to improve your credit-based insurance score

Credit scores change slowly, but steady habits help. The NAIC suggests:

1. Pay bills on time, including taxes and fines. Payment history counts the most.
2. Catch up on past-due accounts.
3. Keep credit card balances low compared with your limits.
4. Check your credit reports and dispute anything that is wrong.
5. Be careful about opening many new accounts in a short time, since pursuit of new credit is part of the score.

When your credit improves, ask your insurer whether it will re-score you at renewal. Some re-check credit only at certain times.

Extraordinary life circumstances

The NAIC says many insurers will reconsider a premium change if you went through an extraordinary life event, such as a catastrophe, losing your job or a serious illness. Ask your insurer in writing and include documents. Your state insurance department can tell you whether your state has its own rules on this.

Questions to ask your insurer

1. Did you use a credit-based insurance score to price my policy?
2. Which tier or category did it put me in?
3. What were the main reasons my score was not better?
4. Will you re-score me if my credit improves, and when?
5. Do you offer exceptions for extraordinary life circumstances?

Answers can help you decide whether to compare quotes. Insurers weigh credit very differently, and in some states not at all. See shopping at renewal.