Why You Should Shop for Car Insurance After Paying Off Debt

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Any significant change in your life circumstances can result in a change to how auto insurance companies will classify you. The riskier you appear to be as a driver or customer, the higher your car insurance rates tend to be, and the more expensive broad types of coverage will be for you.

In fact, the factors that affect your car insurance rates are wide ranging. Common auto insurance rate factors include your average income, education level, driving history, occupation, and even your gender.

Many car insurance companies even take into account certain information in your credit history, although this practice is somewhat controversial. Depending on where you live, the laws in your state may determine or restrict the ability of insurance companies to factor in your credit score when generating insurance rates.

But, in many states, your credit score will be one of the main auto insurance rate factors.

If you have recently paid off a credit card, home or student loan, or other personal debt, it is likely that you will have seen some level of improvement in your credit score. Especially after paying down a debt, it’s an opportune time to shop around and compare automotive insurance plans because one of the key factors affecting your car insurance rates has changed in a beneficial way.

How Credit Affects Car Insurance in Different States

The impact of your credit score on your auto insurance costs will vary widely. This depends both on the particular calculations that your specific insurance company uses and also which state you’re living in when purchasing insurance.

For example, one Consumer Reports map found that the difference in costs for drivers with “good” credit, as opposed to “perfect” credit, ranged anywhere from $68 to $526. That extra cost adds up fast!

One of the states where this kind of credit score consideration is the most notable is Florida, with drivers pay $2,417 for low credit scores, on average. Similarly, consumers in Michigan with bad credit scores see an average increase of $3,354 to their annual insurance costs.

Of the factors that affect auto insurance rates, credit scores have the potential to influence the cost for drivers more than any other single factor. That means that for many drivers, it’s less costly to have a spotty driving record than a low credit score.

However, there are three states – California, Hawaii, and Massachusetts – that have passed regulations to stop insurance companies from using drivers’ credit scores as part of their auto insurance rate factors.

How Insurance Companies Determine the Quality of Your Credit

It may seem intuitive and reasonable that insurance companies would include your credit score among the factors that affect your car insurance rates. After all, your credit score gives a rough picture of how likely you are to pay back loans and pay down debts, and insurance companies want to know that you’ll be a reliable customer before they sign you up for a policy.

But not so fast. This view doesn’t provide the full picture of how insurance companies evaluate drivers’ credit scores.

Rather than simply examining your common FICO credit score and determining the likelihood that you will pay your bills fully and on time, auto insurance companies access your credit records and carefully pick through them for the factors they’ve decided are most relevant.

These companies cherry-pick certain parts of the information on your credit history in order to create a proprietary credit score that estimates how likely you are to file a claim with them in the future.

These specialized credit ratings tend to ignore personal information like gender and employment. Instead, they mostly look at factors like your total debt, driving history, and previously filed auto insurance claims.

If they find that a consumer has a higher potential of filing a claim (for any reason), that driver will likely face steep insurance rate increases. Increases in insurance premiums based on credit scores can even effect consumers with no prior accidents or traffic violations. Pretty unbelievable, right?

In these cases, the impact of your credit score is not about how responsible you have been with your finances in the past. Generally, it’s about how likely you are to present any cost to the auto insurance company in the future.

And, financially, it makes sense that insurance companies would want to rely on these industry-specific credit reports. Many studies, including one conducted by the Federal Trade Commission, have found evidence that these measures are fairly good at predicting the likelihood that drivers will file future claims.

Credit Score Indicators and Tips for Improving Your Credit Score

Because your credit score is likely to be one of the factors that affects your car insurance rate – unless you live in California, Hawaii, or Massachusetts – it can be helpful to understand what factors influence your credit score and the different ways that you can improve it over time.

First, we’ll examine a few of the most critical elements that influence your credit score. Then, we’ll take a look at what to do to decrease your auto insurance costs by improving your credit.

A good rule of thumb is that those elements of your credit history that indicate to companies and lenders that you usually engage in responsible and productive uses of money and debt will likely increase your credit score. Again, this is not because companies love responsibility for its own sake. It’s because companies want to minimize their financial risk when doing business with or lending to particular consumers.

Some indicators that can positively influence your credit score include:

  • A history of making all payments on time
  • Good standing on all of your current accounts
  • A credit history that has been favorably scored over a long period of time

Indicators that tend to negatively influence your credit score, and ultimately, your car insurance premiums, include:

  • Past-due balances on open accounts
  • Lines of debt that have been sent to collections
  • Disproportionately high debt
  • Little or no credit history
  • An excessive number of credit report inquiries

So, it stands to reason that shifting your financial situation away from these negative indicators, and toward the positive ones listed above, will improve your credit score. This is obviously much easier said than done – increasing your credit score requires lots of time, effort, and available opportunities.

Improving your credit score is possible, regardless of your income, and here are some of the common strategies for doing so:

  • Pay all of your bills and credit payments on time
  • Request a credit report to understand your current situation
  • Only apply for one new credit card or other line of credit at a time
  • Pay off all debts and accounts that are in collections
  • Establish a variety of types of credit (but not all at once)
  • Don’t maintain high balances on credit cards, even if you’re paying them off regularly

By applying these best practices whenever possible, you can gradually improve your credit score, which will positively impact the cherry-picked factors that affect your car insurance rates.

Credit Score Changes and Car Insurance Rate Factors

Shopping around for the most cost-effective car insurance plans by comparing rates through Compare.com is a good idea any time you experience changes in your financial situation. This is true whether you have seen a significant change in your credit score because you’ve been applying the strategies listed above, or if you’ve just paid off the remaining debt from a credit card, home loan, or student loan.

If you live in one of the many states where insurance companies are allowed to include credit scores among the factors affecting car insurance rates, then an improvement in your credit score means you could be saving a significant amount of money each month. You can make certain that you are not overspending on your car insurance premiums by comparing car insurance quotes whenever your credit score changes.

Compare.com provides you with the tools you need to find a car insurance policy that is right for your vehicle and budget. After entering the relevant information, we provide you with multiple policies from dozens of top-rated auto insurance companies in a side-by-side format. This allows you to directly compare the elements that are most relevant for your auto insurance needs.

Compare rates from the country’s top companies side-by-side

While there are many factors that affect auto insurance rates other than your credit score, as we explained above, the proprietary credit scores that insurance companies develop are often the most influential factor in what you end up paying.

After paying off a line of credit or debt, auto insurance companies will reevaluate your level of risk and this typically results in them offering you coverage at a lower payment.

Car Insurance for Bad Credit

It may be the case that your credit didn’t reach the highest FICO categorization of “Exceptional” after you paid off that credit card or paid down that home loan. Even so, it’s still helpful to compare auto insurance rates against the background of your current credit score if you’ve seen any recent changes. Of course, there are many drivers who don’t have perfect credit and they need car insurance too.

Even if your credit score improvement simply took you from “Very Poor” to “Fair,” sites like Compare.com can still provide information that can help you to find auto insurance premiums that reflect that improvement. For some drivers, this will mean a cheaper version of similar coverage, but for others it may mean paying a similar amount for coverage that is more comprehensive.

There are also several car insurance companies that specialize in insurance specifically for drivers with bad credit.

So, whether your credit score is through the roof or if you’re shopping for car insurance with bad credit, shopping around and comparing rates is a smart decision. No matter which insurance options or price points are right for you, comparing plans to find your best fit is always a good idea after paying down debt.

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