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

Key Points
  • 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.
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.

Car Insurance Rates Wojcik 170522

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

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.

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