Study: Poor credit can raise car insurance rates 114%

Introduction

Your credit score — one simple number — can affect all aspects of your financial and personal life. A high one can open all kinds of doors, while a low one can feel like doors slammed in your face — making everything you do harder and more expensive to achieve.

Your credit score is a factor in loan, lease and credit card applications, and it can even decide whether you can buy a cell phone plan or open a bank account. 

But not everyone knows: it also affects insurance premiums. In fact, even with spotless driving records, drivers’ credit scores can more than double their car insurance rates.

Some consumers might call that unfair, and they wouldn’t be alone. Four states — California, Hawaii, Massachusetts and Michigan — have banned insurance companies from using credit scores to price or deny insurance policies. Three more states — Maryland, Oregon and Utah — have restricted credit scores being used as a factor to deny or cancel policies. And recently, both state-level and federal legislators have started considering further bans on credit as a rating factor (a characteristic about a driver that’s used to price insurance).

Here’s what The Zebra found in an analysis of the effect of credit scores on 83 million car insurance rates:

• Nationally, improving your credit score from Very Poor to Exceptional would yield a 114% savings. That's an average of $1,537 saved per year!
• Depending on the laws about insurance in their state, drivers with Very Poor credit scores can see rate increases anywhere between 56% and 207%.
• Drivers can lower their insurance rate by an average of 17% (or $384) by improving their credit score by just one tier.
• Laws about the use of credit scores and histories in insurance rating are changing, and it could mean savings for some drivers.

Drivers with Very Poor credit pay 114% more than those with Exceptional credit

Nationally, drivers with Very Poor credit scores (under 580) pay an average of $2,887 a year for their car insurance, while drivers with Exceptional credit scores (between 800 and 850) pay just $1,350 per year — even if they have the exact same driving record. 

That’s an increase of $1,537 every year, or 114%, for having a bad credit score. By contrast, the average driver sees an insurance rate increase of $1,212 after causing a hit-and-run. In other words, as far as insurance goes, it’s more expensive to have bad credit than it is to have committed even the worst traffic violations.

The impact of credit on car insurance rates varies from state to state

Every state has its own laws about how insurance is priced, including whether or not insurance companies can use your credit score to set your insurance premiums. In the vast majority of states — 42 and Washington, D.C. — insurance companies are free to consider their customers’ credit scores when determining rates and whether to deny, cancel or refuse to renew a policy. This leads to rate increases of anywhere from 56% in North Carolina to 207% in New York if a customer’s credit score drops from Exceptional to Very Poor.

Four states have banned credit scores as a rating factor: California, Hawaii, Massachusetts and Michigan. 

Here’s a full list of how much credit affects prices in all 50 states and the District of Columbia.

Drivers can lower their insurance rate as much as 24% by improving their credit by just one tier

Improving their credit score is one of the most effective ways for drivers to save on car insurance. Moving up just one credit tier saves an average of 17% (or $384) nationally, and up to 24% depending on the state.

Even better, drivers with the worst credit scores benefit the most from improving it. The move from a Very Poor to Average rating saves 20%, while every other improvement saves 16-17%.

Laws about the use of credit to determine insurance prices are changing, and it could mean savings for drivers

Changes to laws about the use of credit scores in car insurance pricing, denial and renewal have typically passed very slowly. California, Utah and Massachusetts changed their laws in the early 2000s, and Maryland and Oregon changed theirs in the early 2010s. Michigan’s laws occurred in 2020. 

In 2020, U.S. Senator Cory Booker (of New Jersey) proposed the PAID Act, or Prohibit Auto Insurance Discrimation Act, which would prohibit credit as a rating factor nationally. As of early 2022, this bill remains in Congress in committee. 

But would these laws result in savings for drivers? For most, yes, but not for drivers with the very best credit scores.

Michigan’s law provides a good illustration. The numbers above are from the year prior to the legislation being passed. Without it, Michiganders with Very Poor credit scores would have paid an average of $8,640 for their car insurance every year, while those with Exceptional credit scores paid an average of $2,326. Assuming all else was equal, that year both paid an average of $3,096 after the credit ban. 

This year, the average amount Michiganders paid across all credit score levels was $2,639. While this means that drivers from Very Poor to Excellent credit scores paid less, those with Exceptional scores did pay slightly more.

Tips for drivers

If a driver has a bad credit score, chances are they’re paying a lot more for insurance than some of their neighbors. But the good news is that there are ways to save, regardless of credit:

• Shop around. Some insurance companies cater to customers with poor credit. If drivers are paying too much for insurance with their current company, another company might be willing to work with them for a lower price.
• Make small improvements. If a driver has a bad credit score, their finances aren’t a lost cause. Doing whatever they can to improve their score can help save not just on car insurance, but also on credit card payments, access to refinancing options, and more. The more they save, the more they can apply toward debts and improve their score even more.
• Look for discounts. Some insurance companies offer discounts for taking defensive driving courses, staying accident-free, earning good grades and more. Drivers should ask their insurers what discounts they might qualify for.
• Even drivers with good credit can save. The more a person improves their credit score, the more savings they’ll see on their insurance premiums. Even moving from Good to Exceptional credit can save an average of 30%, or $584, every year.

Methodology

Between September and December 2021, The Zebra conducted a comprehensive auto insurance pricing analysis using its proprietary quote engine, comprising data from insurance rating platforms and public rate filings. The Zebra examined more than 83 million rates to explore pricing trends across 34,500 U.S. ZIP codes and Washington, D.C. 

Analysis used a consistent base profile for the insured driver: a 30-year-old single male driving a 2017 Honda Accord EX with a good driving history and coverage limits of $50,000 bodily injury liability per person/$100,000 bodily injury liability per accident/$50,000 property damage liability per accident, with a $500 deductible for comprehensive and collision. 

Finally, some rate data may vary slightly throughout this report based on rounding.