Your credit score matters in a lot of areas of your life, but you might think it's only important for securing a loan for a home or new car. However, your credit score can actually play a wider role than you might realize, especially when it comes to your vehicle. Here's how your credit health and history play a role on the road:
Why credit matters to insurance companies
Your credit score and history can show lenders what type of borrower you are. For someone with little or no credit history, lenders can't exactly tell if you are likely to repay your loan on time, which is why your credit score may suffer without any history. When it comes to insurance companies, think of your credit score as a barometer for responsibility.
Insurance companies need to determine what type of risk you pose on the road. They will look at your driving history to see if you have any tickets or moving violations and accidents, as well as your age, gender, type of vehicle and where you live. All these factors play a role in assessing your potential risk. Credit matters because a person with a high score could be considered more responsible. Typically, someone with a perfect credit score has low balances, a few credit cards - but not too many - and pays their bills on time. Combined, these can reduce a person's risk if they are considered responsible.
How much your credit score matters
When you purchase a car, you need to get auto insurance right away. If you have a less-than-perfect credit score, the price of insuring your new ride could be higher than you had thought. The difference of a few points in credit scores can actually be costly.
WalletHub found that the average difference in insurance costs between a person who has perfect credit and one who has no credit history was 65 percent. In some states, the difference was even higher, though in others played a very small role in price fluctuations. Credit.com compiled this information and ranked the states with the highest price differences. Here are the five states where your credit score is most likely to determine your rate:
Credit-based insurance scores
Using your basic information, insurance companies will compile credit-based insurance scores that aren't used in any other area of your life. This is simply a number, like your credit score, that predicts how likely you are to file an insurance claim. Companies will use this number for setting your insurance rate. According to Esurance, all states except California, Hawaii and Massachusetts use these insurance scores.
The Federal Trade Commission conducted a study and found a direct correlation between credit-based insurance scores and the risks that drivers pose. The study confirmed that these scores are an effective measurement of risk. It is therefore beneficial for drivers to boost their credit scores to lower their rates.