How Much Does Credit Score Affect Car Insurance Rates

Updated: January 08, 2024 Author:

Quick answer: Generally speaking, if you have a low credit score you can expect to pay more for your car insurance than if you had a better credit history. This is because taking out car insurance with the standard monthly repayments most motorists opt for is actually a form of credit. A lower credit score indicates a higher likelihood of defaulting on the payment agreement, and therefore higher charges are levied to manage the risk level. 

    How is my car insurance actually calculated?

    Factors such as your age, years of driving, and type of car (engine size) will all be considered when calculating your insurance. Previous claims for accidents when you may have been found to be at fault will also be worked into the equation as the insurer needs to have an accurate picture of your driving standards. What many people don’t think about is that credit history is also factored into the final calculation. 

    Before we get onto why that is the case, it is important to note that the rates insurers will charge you is going to vary from one insurer to the next. Shopping around and comparing quotes will provide you with a much better idea of your options than simply opting for the first quote you receive. Remaining calm and systematically working through your options with the aid of price comparison sites is the way to go here. 

    Why can my credit score affect my insurance rate?

    While this may sound like an arbitrary judgement designed to make things a little bit harder, it’s important to remember that paying for insurance in instalments is a form of credit. Many motorists prefer the financial flexibility of avoiding a lump sum for annual insurance coverage and opt for monthly payments. Because you are getting a year of coverage upfront and then spreading the cost over the coming 12 months, you are repaying the insurer. This is why these types of agreements are a form of credit. 

    When applying for credit arrangements of this kind, it is commonplace to have to pass a full credit check. While there is no definitive threshold score you have to meet to be accepted, it is worth noting that the lower the score the more likely you are to be refused. In many cases of a low credit score, the insurer will either charge a higher premium or only accept your application if you pay in a lump sum. In other — albeit less common — cases, they may refuse to insure you at all. 

    While raising your credit score is not an overnight fix, steps can be taken to improve your score over time. The key is to then find a suitable car insurance solution in the meantime so that you can stay on the road. 

    Will being refused by one insurer make it harder to get insurance elsewhere?

    While every insurance company has a slightly different mechanism for assessing and issuing car insurance policies, failing multiple credit checks in a short period of time can hurt your chances of being accepted. This is why careful planning and consideration of your options is essential when searching for the right car insurance. You may want to consider the following approaches and solutions: 

    • Are you able to be insured on someone else’s car in the short term?
    • Can you afford to pay an annual lump sum rather than apply for monthly repayments and the credit arrangement that comes with them?
    • Is your financial situation such that public transport and liftsharing are more viable solutions, at least for the short term?

    Improving your credit score and turning around your financial situation isn’t something that will happen overnight. Taking prudent decisions in the here and now can help you turn the situation around as you get back into the position you want to be in. 

    How do insurers view applicants with low credit scores?

    At this point you may feel like the system is stacked against you, and this is a natural response when getting the products and services you need becomes harder. The important thing to remember here is that no judgements are personal — even though they may feel like they are — insurers are simply balancing risk. 

    There is a misconception that insurers will look at a low credit score and then make a series of extrapolated judgements about your lifestyle. Just because someone has a lower credit score than they would ideally want does not make them any less safe behind the wheel of a car. 

    Yes, less than ideal finances are a common source of stress and can make many things in life that bit more difficult, but insurers do not take this as evidence that you are more likely to claim. The reason low credit scores typically drive increases in premiums is a judgement on the likelihood of defaulting on payments, not on being involved in an accident resulting in a claim. 

    How do I raise my credit score to get better car insurance rates? 

    When you set out to improve your credit score it’s important to note that this is typically a gradual process. You will not be able to secure a significantly improved offer from an insurer the following week simply by making a few changes to how you structure your personal finances, for example. That said, taking action promptly will start the process of improving your credit score:

    • Pay back more than the minimum monthly repayment on things like loans and credit cards when financially viable 
    • Be proactive when it comes to discussing potential issues regarding repayments with lenders and work constructively to find a solution 
    • Create a clear plan for applying for car insurance so that you avoid having multiple checks run on your credit profile in a short period of time 

    A proactive and strategic approach to your personal finances will, in time, result in a better credit score and therefore lower car insurance premiums. Being consistent when it comes to executing your strategy is always the best option.