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Bad credit and car insurance

In most states, your credit can affect your car insurance rates. Drivers with bad credit pay more for their insurance, and in some cases significantly more. Currently,  California, Hawaii, Washington and Massachusetts ban the use of credit scores in setting car insurance rates. 

Insurers say the 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.

The credit score used by insurance companies is different from that used when you apply for a credit card or a loan. Insurance companies look at specific aspects of your credit history. However, if you have a low FICO score, you probably have a low insurance score as well.

Below, we'll cover how bed credit affects car insurance rates and what you can do to save money.

How does credit score affect car insurance?

Your credit score is one of the many rating factors that are used to calculate how much you pay for car insurance. How much it will affect your rates depends on your credit-based insurance score, which is calculated differently depending on the company.

Because each company decides how much weight it will give to each rating factor, some companies might not rely as heavily on credit as others. However, if you live in a state where it's legal, you can expect some level of impact on your rates due to your credit.

Key takeaways

  • In most states, it's legal for car insurance companies to use credit history as a rating factor, and it can have a big impact on 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 on average.
  • Shop around for cheaper rates while you work to improve your credit score.

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, take a look at the table below.

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

The cheapest car insurance company for bad credit depends on a lot of factors, including where you live and your age. However, based on an analysis of average rates for a 40-year-old driver, Geico has the cheapest car insurance with bad credit.

CompanyGood creditPoor credit% Increase$ Increase 
State Farm$1,400$3,012113%$1,613

Best auto insurance companies for drivers with poor credit

Although your credit will affect your car insurance rates in most states, there are many other things that affect rates. That's why it's important to shop around. 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

Not every company weighs rating factors the same way, so comparing rates from multiple companies will help you find the company with the best rates for you, regardless of your credit score.

Does bankruptcy affect your car insurance rates?

It can, 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. 

How to improve your 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 have the right to get a free copy of your credit report each year.

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.

How to save on car insurance if you have bad credit

The number one thing you can do to save on car insurance with bad credit is to shop around.  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.

You can also consider raising your deductible, which will lower your rates; just make sure you can handle that deductible if you need to pay it.

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