There are many misconceptions in the market about how car insurance is priced, and one of the most prevalent is the notion that a consumer’s car insurance premiums are based on their driving record and the type of car they drive.

In most states, the majority of a consumer’s auto insurance premiums are actually determined by their credit history.

The difference between a good and a poor credit score can amount to hundreds of additional dollars per year.

The Connection Nobody Explains

Insurance companies use a “credit-based insurance score.

This differs from your bank score, but it’s largely based on the same information: your payment history, credit utilization, length of credit history, and mix of accounts (e.g., credit cards, installment loans).

Why would an insurer care about any of that?

Actuarial studies conducted over the last several decades have found that consumers with lower credit scores file auto insurance claims more frequently than those with higher credit scores.

In the end, insurers use a variety of factors to price out risk, and the score that they receive for you can end up greatly influencing your insurance rates.

As such, it’s very important to keep in mind that your two very different drivers with the same car, same history, and same location can end up paying completely different premiums depending on their individual credit scores.

However, two very different prices can result in two very similar drivers.

For example, two drivers with identical clean driving records, who drive the same car and the same address, can receive very different insurance quotes and prices if one driver has a better credit profile than the other.

Why This Matters More Than People Realize

So while you’re spending months trying to negotiate the lowest rate from the various insurance providers, adjust your coverage to lower your premiums, or even lower your deductibles to reduce your premium — all the time thinking you’re getting the best price for your insurance — the largest factor of your rate, your credit score, is sitting quietly in the background, never to be addressed.

Similar to trying to stop a leaky faucet by mopping up the water, to lower your rate you must address the factors that determine it rather than negotiate a better rate with a different insurance company.

I don’t know how to stress enough that as you are paying to fix your credit to get better loan rates, the same good work is translating into the lowest insurance rates.

Yes, it takes time for the credit scoring models to reprice your risk every time you go to renew your auto insurance, but it’s great to know that the good work you’re doing in other areas of your life will have a very nice payoff as well.

What You Can Actually Do About It

The first step is to know what is in your credit file.

There may be errors that are bringing your score down, and you may not even be aware of them.

A single late payment, for example, could be bringing your score down for years.

And if there are accounts listed that aren’t even yours, that could bring your score down as well.

Check your credit reports.

Review all three credit bureau reports and make sure that there are no errors.

If there are errors, dispute them. Incorrect late payments or accounts that you did not open can negatively affect your credit score.

In addition to finding out what’s in your scores, the most important thing to do is to find out what’s in your credit file, in case there are any errors.

Inaccurate late payments can hurt your score, and if accounts listed are not even yours, that can hurt your score too.

Disputing any errors you find can be an easy way to fix any problems with your score.

To that end, it is also worth noting that some states don’t allow insurance companies to base their auto insurance rates on a driver’s credit score.

For example, California, Hawaii, and Massachusetts restrict or even ban the practice altogether.

That said, if you live in a state where insurance companies can use your credit score to determine your rate, it is good to know how they work to be as informed as possible.

Timing Your Next Move

As your credit score goes up, it’s worth taking a look at your auto insurance quotes, because as your credit score improves, the way that insurers price risk to you changes.

The rate you’re paying a year ago is likely to be different from the rate that you get quoted today for the same policy with the same terms.

By periodically shopping for insurance, you can confirm that your credit work is translating into cost savings and that your current rates are competitive.

Such a small habit can have a very large positive return over time.

Insuring your car and managing your credit may seem like two separate issues, but in reality they are connected.

So long as you are managing one well, you can be confident that the other is working well for you too.

The habits that go into building your credit in the best way to protect yourself as a borrower are also the best habits to save you the most money on insurance for your car.

The Bigger Picture

However, credit is just one of the many variables that make up your auto insurance premiums.

Other relevant variables include your driving record, the type of insurance you are purchasing, and even where you park your car at night.

Credit information is one of the few components of your auto insurance premium that you have significant control over.

So what’s the takeaway here?

There’s more good news here for those who are already improving their credit: you are probably farther along than you think, and the savings will likely appear when you least expect them, just as did the problem.