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Bad credit and car insurance

No one wants to talk about bad credit. We get it. But the reality is, poor credit affects many aspects of life, including car insurance in most states.

Some car insurance companies will increase your car insurance rate if you have bad credit. Others are more friendly for those with bad credit, similar to credit cards for consumers with bad credit.

More than 90% 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, Washington 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 as lenders. They look at a score designed specifically for them. The credit score used by lenders predicts your ability to repay a loan. A credit-based insurance score predicts whether you'll file claims.

  • In states that use credit-based insurance scoring, a poor credit score may result in higher car insurance rates.
  • The difference in good credit and poor credit car insurance rates is about 18% nationwide.
  • Geico offers the cheapest rates for drivers with poor credit, based on the user profile we used.
  • When shopping for car insurance, look for companies that offer discounts that can help offset the increased rates due to poor credit.

How much does bad credit increase your car insurance rates?

In states where a credit-based insurance score is allowed to influence auto insurance rates, the impact of bad credit can be severe.

In addition, your credit may affect the size of the down payment an insurance company requires and which payment options you are offered.

Insurance.com commissioned Quadrant Information Services to compare full-coverage rates for drivers with fair, bad and good credit. Nationwide, the average difference in rates between good credit and fair was 18%. The difference between good credit and poor credit was 71%.

The amount your rate is hiked also depends on your driving record, where you live, your car insurance company and state insurance laws, among other factors. But to get an idea of how much more you pay as a driver with bad credit, the table below shows the average rate increases by state.

StateAverage rateRate with poor credit% increase$ increase
New Jersey$1,419$2,925106%$1,506
New York$1,214$2,25586%$1,041
South Carolina$1,353$2,38676%$1,033
Rhode Island$2,011$3,49674%$1,485
South Dakota$1,250$2,11970%$869
North Dakota$1,123$1,87367%$750
New Mexico$1,498$2,40460%$906
New Hampshire$1,156$1,84660%$690
West Virginia$1,467$2,16748%$700
North Carolina$1,170$1,31713%$147

Cheapest car insurance for drivers with bad credit

To reveal the cheapest car insurance companies for drivers with bad credit, we used Quadrant Information Systems to gather rate data from up to six major insurers in 10 ZIP codes in each state, for a driver of a 2017 Honda Accord, age 40, with full coverage and a $500 deductible.

Geico proved to offer the cheapest car insurance for this driver profile with bad credit.

CompanyGood Credit RatePoor Credit Rate% Increase$ Increase 
State Farm$1,400$3,012113%$1,613

Best auto insurance companies for drivers with poor credit

If you live in a state that does not use credit-based scores (California, Hawaii, Massachusetts and Washington) then you may be in luck because your credit score will have no impact on your car insurance rates.

If you do live in a state that uses credit-based insurance scoring, you'll want to look for insurance companies that offer a variety of discounts that can help offset your rates. Here are some discounts to look for when shopping for car insurance:

  • Good driver discount
  • Accident-free discount
  • Multi-policy discount
  • Paid-in-full discount
  • Paperless billing / electronic discount
  • Vehicle safety equipment discount

Does bankruptcy affect your car insurance rates?

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. 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.

Does credit score affect car insurance?

Insurance companies say the most important factors for a good credit-based insurance score are 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 aren't 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.

How to improve car insurance credit score

Here's what you can do to improve your credit-based insurance score and get lower premiums:

  • Pay your bills on time and keep all your accounts in good standing. Late payments and collections will hurt you.
  • Keep your credit card balances low. The insurance score considers the amount you owe in relation to your credit limits. Avoid maxing out your credit cards.
  • Don't open unnecessary credit accounts. Too many new accounts signal trouble. Only open the credit accounts you really need.
  • Establish and maintain credit. The longer you maintain a decent credit history, the better. Having no or little credit history will lower your score.
  • Make sure your credit report is accurate. A mistake could ding your score. You can request free copies of your credit reports from the three national credit reporting agencies through AnnualCreditReport.com. Follow directions from the agencies to fix any errors.

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.

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 Penny Gusner, senior consumer analyst for Insurance.com.

A good way to get a fix on your consumer credit scores is to monitor them through a site, such as Credit Karma. It offers a free way to see a score calculated by credit bureaus as well as the credit reports on which it is based.

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.

How to save on car insurance if you have bad credit

High-risk drivers can still save on car insurance.No two car insurance companies will have identical prices for the same policy. The difference in what you pay from one carrier to the next can vary by hundreds of dollars, sometimes more. So it pays to compare quotes even if you have bad credit.

Another option is to look into car insurance companies that specialize in high-risk driver insurance. For instance, Victoria Insurance, which specializes in such policies, increases rates by 38%, on average, for bad credit, Insurance.com rate data show. That's nearly a third less than the nationwide increase of 71%.

Whether you have good, fair or bad credit, the same advice applies for car insurance -- shop around. Get at least three quotes for the same coverage. Ask about discounts. With that information, you may be able to save hundreds from your car insurance each year.