A bad credit history won't just boost the cost of your car loan. It will probably jack up your car insurance rates.
More than 90 percent of insurance companies consider credit history as one of the factors when setting car and home insurance rates.
Almost all states let insurers do this -- except for California, Hawaii and Massachusetts, which ban the practice.
Insurers say loads of data show a connection between credit history and the filing of claims. People who pay their bills on time on average file fewer and less costly claims than those with a lot of late payments or delinquencies.
Insurance companies don't consider the same credit score that lenders do. They look at a score designed specifically for them. The credit score used by lenders predicts your ability to repay a loan. An credit-based insurance score predicts whether you'll file claims.
In states where a credit-based insurance score is allowed to influence rates, the impact of bad credit can be severe.
Insurance.com commissioned Quadrant Information Services to compare full-coverage rates for drivers with average or better credit, fair credit and poor credit.
Nationwide, the average difference in rates between good credit and fair was 17 percent. The difference between good credit and poor credit was 67 percent.
State Farm -- $563 if she has excellent credit, $755 if she has average credit and $1,277 if she has poor credit.
Allstate -- $948 if she has excellent credit, $1,078 if she has average credit and $1,318 if she has poor credit.
In addition, your credit may affect the size of the down payment an insurance company requires and which payment options you are offered.
Your consumer credit score touches many aspects of your finances: car loans, credit cards, mortgages and even employment.
“The better your credit, the more money you’ll save, so knowing your credit score and monitoring your credit history can enable you to make smarter financial choices and to get the most of your money,” says Loryll Nicolaisen, managing editor of WisePiggy.com, a site that offers consumer credit advice and free credit scores and credit reports. (See "Better credit? Get cheaper car insurance.")
The short answer is—it's likely, but how much depends on your credit rating before the bankruptcy. If you have insurance and continue making your payments, you're less likely to see a rate increase at renewal, but some companies will check your credit once a year. A lower credit rating may lead to a rate increase.
Any type of bankruptcy filing will hurt your credit rating and will remain on your record for up to 10 years. During that time, car insurance companies that use credit as part of their risk assessment may increase your rate or may decline to offer you the lowest rates available. If you're shopping for a new policy post-bankruptcy, you may find that some companies will not offer you a quote, if bankruptcy is used as a risk factor.
Is this fair? Well, using credit history as one factor in insurance pricing is a lot like looking at an individual's driving history: a large number of accidents or violations means that driver may not be responsible and presents a greater risk to the company. A bankruptcy is a bit like a financial accident or violation. It strongly indicates, in much the same way as a traffic violation, that the individual had some difficulty with their finances—and some insurance companies have determined that insurance risk increases as financial stability decreases.
Insurance companies say the most important factors for a good credit-based insurance score are a long credit history, minimal late payments or past-due accounts, and open credit accounts in good standing.
Typical negatives include past-due payments, collections, a high debt level, a high number of credit inquiries and a short credit history.
Your income, age, ethnicity, address, gender and marital status are not considered as part of the score.
The use of credit for setting premiums is controversial. Some consumer advocates say it unfairly penalizes people with low incomes or those who have job losses – the people who need cheap car insurance the most.
But insurers say when combined with other rating factors, the use of credit-based insurance scores helps them set accurate rates.
Here's what you can do to improve your credit-based insurance score and get lower premiums as a result:
If you're struggling to pay bills and have trouble keeping up with credit accounts, get professional finance advice. You can find free or low-cost help through the nonprofit National Foundation for Credit Counseling.
As your credit scores improve, your car insurance rates are likely to decline. You should consider comparing car insurance quotes at renewal time if you have seen a positive trend in your scores.
A good way to get a fix on your consumer credit scores is to monitor them through a site such as Credit Karma or WisePiggy. They offer a free way to see a score calculated by credit bureaus as well as the credit reports on which it is based.