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Car Insurance Usually Costs More for Those With Bad Credit

Want to lower your car insurance premium? The key is to improve your credit score. That’s the finding of a recent study by WalletHub, a personal finance site.

In all but three states (California, Massachusetts and Hawaii), bad credit often means paying more — on average, about 49 percent more — for your auto insurance. The other 47 states, as well as Washington, D.C., allow insurance providers to access the credit histories of people applying for car insurance and use that information when determining monthly premiums.

Why Your Credit Score Matters

There is a long-held belief among insurance providers that people with spotty credit histories have money problems and are more likely to file claims. Insurance companies aren’t charities. They are in business to make a profit, and to accomplish that, they must take in more in premiums than they pay out in claims. In light of that, insurance companies tend to charge policy holders with lower credit scores more than those with spotless credit, just as they charge people with several accidents or speeding tickets more than those with a clean driving record.

How Much Can Premiums Differ?

Where you live can make a big difference in how much your credit affects the cost of your car insurance. Among the 47 states allowing insurance providers to access credit histories, they have the least impact in Connecticut, where someone with bad credit only pays about 15 percent more on average than someone with excellent credit. Michigan is the worst, where the difference is 115 percent.

These are the top-five states where credit scores have the highest impact:

  • Michigan — 115 percent.
  • South Carolina — 87 percent.
  • Maine — 70 percent.
  • Pennsylvania — 69 percent.
  • Virginia and New Jersey — 68 percent.

Does It Vary by Insurance Company?

Some insurance providers assign more weight to credit history than others. Among the top five U.S. car insurers, bad credit will increase premium cost by 62 percent at Farmers Insurance — the largest difference among the top five. The smallest fluctuation is 32 percent at GEICO.

Here’s how the top five stack up:

  • Farmers Insurance — 62 percent.
  • Progressive — 60 percent.
  • State Farm — 54 percent.
  • Allstate — 52 percent.
  • GEICO — 32 percent.

Which Insurance Providers Are the Most Up-Front?

When offering a quote, some insurance companies are more open about their use of credit scores in setting premiums. Based on how much detail they provide, where this information is located (on page one or page four) and the type size (whether the information is easy to see and read), WalletHub rated 10 insurance companies on the transparency of their use of credit ratings.

Here are the insurance providers rated by transparency, with 10 being a perfect score:

  • Progressive — 10.
  • Farmers Insurance — 9.
  • American Family — 8.
  • USAA — 7.
  • GEICO — 6.5.
  • State Farm — 6.
  • Allstate — 6.
  • Travelers — 5.5.
  • Nationwide — 5.
  • Liberty Mutual — 4.5.

What it means to you: In most states, drivers with bad credit will pay more for car insurance. As your credit score improves, shop around for a better deal on your car insurance.

Russ Heaps
Russ Heaps is an author specializing in automotive, financial and travel news. For nearly 35 years he has covered the automotive industry for newspapers, magazines and internet websites. His resume includes The Palm Beach Post, Miami Herald, The Washington Times and numerous other daily newspapers through syndication. He edited Auto World magazine, and helped create and edit NOPI Street... Read More about Russ Heaps

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