Why does your car insurance rate go up if credit score goes down?

Insurance companies use credit-based insurance scores as a factor in determining auto insurance rates because there is a correlation between credit scores and a person's likelihood to file an insurance claim. Studies have found that individuals with lower credit scores tend to file more claims than those with higher credit scores. As a result, insurance companies view people with lower credit scores as higher-risk drivers and charge them higher premiums.

This practice, known as "credit scoring," is legal in most states, except in California, Hawaii, and Massachusetts, where it is prohibited. In states where it is allowed, insurance companies can consider credit-based insurance scores along with other factors, such as driving history, age, gender, and location, when determining insurance premiums.

Insurance companies believe that individuals with lower credit scores may exhibit characteristics that increase the risk of filing a claim, such as financial instability or a higher likelihood of engaging in risky behaviors.

It's important to note that not all insurance companies use credit-based insurance scores, and the weight given to this factor can vary between different companies. Additionally, some states regulate how credit scores can be used in insurance underwriting.

If you are concerned about how your credit score may impact your auto insurance rates, you can take steps to improve your credit score by paying your bills on time, reducing debt, and avoiding opening new accounts. You can also shop around for auto insurance quotes from multiple companies to find the best rate available to you.