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Poor credit could boost your car insurance rates by almost $2,000

  • Drivers with poor credit may pay an average annual rate that is $690 higher, compared to drivers with good credit, according to NerdWallet.
  • "Interestingly, we found many states where the rates for people with poor credit were higher than the rates for people who had caused a car accident," NerdWallet's Amy Danise says.
Car driver
Meghan Nash | Getty Images

Getting into an accident isn't the only thing that could cause your car insurance rates to skyrocket.

Even something as simple as paying your credit card bill late can boost your rate, as underwriters often look at credit-based insurance scores to gauge the likelihood that you will file a claim.

Drivers with poor credit may pay an average annual rate that is $690 higher, compared to drivers with good credit, according to NerdWallet. Credit scores generally range from 300 to 850, with the average American's FICO score — a model popular among lenders — hitting 699 in April 2016.

By comparison, if you were unfortunate enough to be a driver held responsible for an accident, you could face an average increase of $446, according to NerdWallet.

Affordability issues

"Interestingly, we found many states where the rates for people with poor credit were higher than the rates for people who had caused a car accident ," said Amy Danise, an insurance expert at NerdWallet. "This shows the importance insurers put on credit as a way to predict whether you'll make a claim."

Hefty rate increases are a cost that some Americans simply can't afford. A study from the Treasury Department's Federal Insurance Office found that more than 18.6 million Americans live in areas where car insurance is unaffordable. That study defined "unaffordable" as amounting to more that 2 percent of the median household income for that area.

If you're a resident of Michigan with poor credit, your rate spikes an average of $1,969 more than drivers with good credit, according to NerdWallet.

Residents of California, Hawaii and Massachusetts may count themselves lucky because those states don't allow credit to be used to set car insurance rates.

"Ultimately the regulation of auto insurance companies and rates is determined by each individual state," said Loretta Worters, a vice president at the Insurance Information Institute. "State insurance departments determine the minimum coverage level required to drive legally in the state."

Average car insurance rate increases for those with poor credit in each state, as well as Washington, D.C., are listed in the chart below.

The impact of poor credit on car insurance rates

National ranking (smallest to biggest price increase)
State
Average annual rate increase compared to drivers with good credit
1 Wyoming $275
2 Vermont $312
3 Washington $318
4 Georgia $355
5 New Hampshire $365
6 Iowa $368
7 North Carolina $369
8 Wisconsin $394
9 South Dakota $402
10 Virginia $411
11 Tennessee $413
12 Nebraska $415
13 Maine $443
14 South Carolina $448
15 Oregon $456
16 Alabama $460
17 Florida $481
18 Idaho $539
19 Ohio $567
20 New York $573
21 Pennsylvania $590
22 Kansas $594
23 Missouri $597
24 Montana $597
25 Utah $600
26 Texas $655
27 Oklahoma $657
28 Arkansas $659
29 Arizona $685
30 North Dakota $719
31 Alaska $720
32 Maryland $727
33 West Virginia $737
34 Mississippi $738
35 New Mexico $763
36 Indiana $798
37 Illinois $830
38 Rhode Island $861
39 Nevada $958
40 Colorado $965
41 Kentucky $980
42 Minnesota $1,039
43 Connecticut $1,060
44 New Jersey $1,204
45 District of Columbia $1,340
46 Delaware $1,344
47 Louisiana $1,354
48 Michigan $1,969
Source: NerdWallet

Insurers use proprietary ranges in their ratings decisions, according to NerdWallet.

Your driving record still matters

Worters said most companies take other factors — such as your driving record, your mileage and where you live and park your car — into account when setting rates.

"Generally, due to higher rates of vandalism, theft and accidents, urban drivers pay a higher auto insurance price than those in small towns or rural areas," she said.

While it's easy to understand why things like your driving record may be factored into your rate, Danise said, the reason why credit is considered is more elusive.

"How can something that appears to have nothing to do with what you do when you're behind the wheel have such a huge impact on rates?" asked NerdWallet's Danise. "Insurers only have to demonstrate a 'correlation' between credit and the likelihood that you'll make a claim.

"They don't have to explain the 'why.'"

To bring your rates down, Peter Kochenburger, deputy director of the University of Connecticut's Insurance Law Center, advised checking your credit report to ensure accuracy, paying bills on time and not having several outstanding loans if you can help it.

"Talk to an insurance agent and get some quotes. It's so easy now to get a few quotes with just 10 minutes of work — it definitely pays to shop around," he said.