When you finance a car with a credit score below 680, you already expect the loan rate to be higher. What most buyers do not calculate is that the same credit score is simultaneously raising their insurance premium — often by $1,500 or more per year, according to Bankrate’s analysis of insurance rates by credit tier. These two costs compound. A borrower with a 650 credit score might pay an extra 2 percentage points on their loan and an extra $125 a month on insurance. Over a 60-month loan, that combination adds roughly $5,600 to the total cost of owning the vehicle — money that had nothing to do with the car itself.
In 47 of 50 states, insurers are legally permitted to use your credit history when pricing your premium. If your credit score affects your loan rate, it almost certainly also affects your insurance cost — and most car buyers never calculate both at once.
Why Insurers Use Your Credit Score
Insurers use a Credit-Based Insurance Score (CBIS) rather than your standard FICO score, but the two are strongly correlated. Actuarial data consistently shows that borrowers with lower credit scores file more insurance claims on average — a pattern that insurers use to justify premium differences. This is legal in 47 states; California, Hawaii, Massachusetts, and Michigan prohibit or significantly limit credit-based insurance pricing.
If you live in one of the 47 states where credit-based pricing is permitted, a below-average credit score will affect your insurance rate regardless of your driving record. A clean driving history helps, but it does not override the credit penalty in most pricing models.
The impact is not trivial. Bankrate’s rate analysis by credit tier shows that a driver with poor credit can pay more than double the premium of an identical driver with good credit. Moving one credit tier — from poor to fair, or from fair to good — saves $355 to $489 per year on average.
The Compounding Effect at the Financing Stage
When you finance a car, you lock in two credit-sensitive costs at the same time: your loan APR and your insurance premium. Both are priced against your credit profile, and both hit your monthly budget simultaneously.
Consider a scenario where two buyers finance the same $40,000 car for 60 months. Buyer A has a 740 credit score and gets 6.5% APR with a $780 monthly payment. Their insurance runs $150 a month. Buyer B has a 640 credit score and gets 9.5% APR with an $840 monthly payment. Their insurance runs $260 a month. The difference in loan payment is $60 per month. The difference in insurance is $110 per month. Combined, Buyer B is spending $170 more per month, $10,200 more over the loan term, for the same car.
This compounding effect is one reason we covered what lenders require for coverage when you carry a high-LTV loan. Borrowers with lower credit scores often have higher LTV ratios, which triggers gap insurance requirements from lenders — adding yet another layer of monthly cost.
What You Can Do About It Before You Finance
Check your insurance quote before you commit to the car. Most people buy the car first and shop insurance after. If you have a below-average credit score, getting insurance quotes during the shopping phase tells you what your actual monthly budget looks like before you sign a loan. Quote inquiries for insurance are soft pulls — they do not affect your credit score.
Look at the total monthly cost, not just the loan payment. A dealer might show you a $720 monthly payment that fits your budget. Add $260 in insurance, $80 in fuel, and $60 in registration, and the real monthly cost of ownership is over $1,100. The loan payment is not the cost. The car is.
Improve your credit before you buy if the timeline allows it. Moving from poor to fair credit saves $489 per year in insurance alone, plus meaningfully reduces your loan rate. If you can wait 60 to 90 days and use that time to pay down balances and clear reporting errors, the savings compound across both costs simultaneously.
Shopping for insurance quotes while you are still choosing the car is the step most buyers skip. If your credit is below 700, that step could change whether the monthly total actually fits your budget.
One Thing Worth Knowing About Quote Shopping
Shopping insurance quotes with multiple carriers has no credit score impact — insurers use soft inquiries. You can get five quotes in an afternoon without any effect on the FICO score your lender will pull when you apply for the loan. This makes it easy to get a real insurance cost estimate before you make the financing decision, not after.
Questions About Credit Score, Insurance, and Car Financing
- Can my insurance company really charge me more because of my credit score?
- Which states prohibit using credit scores for auto insurance pricing?
- Will shopping for insurance quotes hurt my credit score?
- How much can I save on insurance by improving my credit score by one tier?
- Is the Credit-Based Insurance Score the same as my FICO score?
Ready to compare your options? Get a free auto insurance quote and make sure your coverage meets your lender’s requirements.
