You Can Get Car Insurance, Even with Bad Credit or No Credit

By Jessica Bosari
After 13 years in personal and commercial insurance, Jessica Bosari now writes about personal finance, car insurance, risk management and related topics. Since 2008, she has been simplifying complex ideas through engaging articles for her readers.

Car Insurance for Drivers with Bad Credit or No CreditFirst, let’s clear something up: you don’t need good credit to buy car insurance. You do, however, need it to save money on car insurance. Many don’t realize just how much their credit scores affect the amount they pay in car insurance premiums. If you have bad credit, your best approach is to work on getting your credit in good shape and apply for car insurance discounts to control premiums while you work on improving your credit score.

Credit: How It’s Used to Determine Your Rates

Most car insurance companies (95 percent) use your credit history in one way or another. But they don’t use it to predict whether you’ll pay your bill on time. Instead, they use it to predict how likely you may be to place an insurance claim with them if they decide to insure you. The National Association of Insurance Commissioners points out that statistically, credit-based insurance scores do a good job of predicting risk. After reviewing your score, insurance companies decide how much they should charge you for insurance.

A 2007 Federal Trade Commission (FTC) study of credit-based insurance scoring confirms that they do a good job of predicting risk on car insurance policies, even though there is no logical reason poor credit should lead to more auto claims. And although some argue that this scoring system divides drivers along racial and economic lines, the FTC study found that even when looking at scores in a pool of drivers from a single ethnic group, the scores still did a good job of predicting risk.

Credit-based insurance scores factor in your credit history, your claims history, and details from your insurance application. Every company has its own formula to apply, but the outcome is substantially the same: If you have bad credit, you’ll have a bad insurance score and pay higher premiums for auto insurance.

How Much Does Your Credit Affect Your Insurance Score?

In Maryland and California, the law prohibits credit-based insurance scoring because of the imbalance it causes with respect to rates charged across different ethnic groups. Everywhere else, your credit history affects your car insurance rates, but how much?

Car insurance companies group credit scores into different categories, based on the number range of the score. While it changes from company to company, the following is an example of what the credit score groups may look like:

  • Very Low: 300-600
  • Low: 600-700
  • Average: 700-800
  • High: 800-900

Those who fall under the “very low” category will pay more than those who have higher scores. They may even pay up to twice as much as those who fall under the “high” category. But specific figures to show how much your credit affects your insurance score are nowhere to be found.

When car insurance companies check your credit report, it doesn’t hurt your score, and the inquiry won’t show up anywhere. This lack of transparency tends to make consumers nervous. Add to that a black hole of information about how credit-based insurance scores are calculated, and we see that trying to figure out exactly how much your credit score affects your car insurance premium is nearly impossible.

Credit Matters, But It’s Not Everything

It’s best to remember that the numbers insurers use to gauge your risk are still just numbers. While you may have bad credit, you may be an excellent driver with no history of accidents whatsoever. For this reason, it is against the law for insurance companies to base your premium on your credit score alone.

If you have bad credit, you can be sure that improving your credit score will save you money on car insurance down the line. Take these steps to clean up your credit and work toward that goal:

Order a copy of your credit report from each of the three credit reporting agencies. You have a right to one free copy every year through annualcreditreport.com. Look for any mistakes on the report that could hurt your credit rating. Follow the instructions on each credit bureau’s website for correcting credit report errors, and follow through to be sure the mistakes are corrected.

Once your report is accurate, you should work toward improving your scores. Start by finding out what your score is through a free service like CreditKarma. Be careful to pay your bills on time every month, and pay down as much of your outstanding debt as you can. When your debt to income ratio comes down, your score goes up, so taking a second job might help improve your score while helping you pay down the debt to improve your score even more.

Lowering Your Premium with Discounts

Once you begin working on your credit, you still have to wait for all those good deeds to catch up with you before it will help lower your car insurance rates. In the meantime, look into these car insurance discounts to see if you can save some money now:

  • Good driver discount – Most, if not all insurance companies offer a good driver discount. Your premium goes down every six months to one year that you go without getting a ticket or being involved in an accident.
  • Good student discount – The student discount is for high school and college students who maintain a certain grade-point average. Keeping your grades up in school means a lower premium, even if you have less than perfect credit.
  • Low mileage discount – If you live very close to school or work, you may qualify for a low-mileage discount.
  • Automatic payments discount – If you sign up to have your monthly premium taken directly from your bank account, you save monthly billing fees.
  • Defensive driving discount – Passing a class on defensing driving can save you up to 15 percent on car insurance for the three years following the class.
  • Car safety discounts – If you drive a car with airbags, anti-lock brakes, electronic stability control or similar safety features, you can earn a discount.

After a year of cleaning up your credit score, you should find that car insurance rates have dropped for you. But because each company calculates your score differently, you may want to shop around for the best quote before making the commitment to buy or renew after your credit is improved.