Categories

Personal Finance

How Is My Car Insurance Rate Determined?

The cost of car insurance depends on a multitude of factors, such as where you live, the insurer, the vehicle you want to insure, the coverage level and even your credit history. Because of various factors, there's no single car insurance company out there that's best or cheapest for everyone.

While shopping around is an excellent way to score a low monthly premium, understanding which factors are included in your car insurance rate can also help you find ways to reduce how much you pay each month.

Factors That Could Affect Car Insurance Costs

Here are the primary elements insurance companies look at when you apply for a car insurance quote.

State and Region

Car insurance is regulated at the state level, and rates can vary by ZIP code. In other words, the exact location of your residence can have a major impact on your monthly premiums.

Urban areas, for instance, typically have higher rates of vandalism, theft and accidents than rural areas. So you can generally expect to pay more living in a city versus a small town.

Insurance Company

There are more than 2,500 property and casualty insurance companies—which includes car insurance—in the U.S., according to the National Association of Insurance Commissioners. And each one treats each of the other factors we discuss differently.

This means that the cheapest car insurance company for a friend or family member, even one living in the same area as you, may not offer you the lowest rates.

Driving Record

Tickets and other violations can have a negative impact on your car insurance rate because they're a sign that you may be a risky driver. Accidents, primarily where you're at fault, can also hurt your chances of getting the lowest rate possible.

In some cases, however, you may even see a rate increase if you were not at fault for the accident but still filed a claim. That's especially the case if you've filed other claims in the past.

Vehicle Type and Use

The type of car you drive is also a key consideration for insurers. For example, cars that are statistically more likely to be stolen may carry higher rates than others that are further down the list. Also, the more expensive the car—and, therefore, the more expensive the potential claims—the likelier that you'll have a higher monthly premium. Insurers use the car's vehicle identification number (VIN) to assess its mileage, accident history and other factors to help determine your rate.

How you use the car is also important. You'll typically share how many miles you expect to drive each year and the primary usage. If, for instance, you have a long commute, you may be more likely to get into an accident than someone who primarily drives on the weekends for pleasure.

Demographics

Car insurers use a lot of data to determine risk profiles, including demographics such as age, gender and marital status. For example, single males under 25 are the most likely to get in an accident, and they can expect their insurance rates to reflect that elevated level of risk.

Type and Amount of Coverage

In most states, you must have at least a minimum level of liability insurance on your vehicle. Even where it's not required, you have to provide evidence that you're financially equipped to pay for damages if you cause an accident.

But beyond that minimum requirement, the types of coverage you choose and how much will be reflected in your premiums. The main coverage types include:

  • Liability: This protects you in an accident where you're at fault; it covers the cost of the damage to the other vehicle and the medical bills resulting from injury.
  • Collision and comprehensive: Collision coverage provides protection if you're in an accident and not at fault, and comprehensive protection covers theft and damage that occurs through other ways.
  • Uninsured/underinsured motorist: If you get in an accident where the other party is at fault and they either don't have insurance or their liability protection is insufficient, this coverage kicks in on your policy to help bridge the gap.
  • Personal injury protection: This component covers medical bills for both you and others in your vehicle at the time of an accident, regardless of who's at fault. Note, however, that it's not available in all states.

Liability coverage tends to be more expensive because the limits are typically higher, and collision coverage is typically pricier than comprehensive and other protections because the likelihood and the potential cost of an accident are greater.

Some insurers will also provide additional coverage types, such as rental car reimbursement and emergency roadside assistance.

In addition to the coverage amounts you choose, insurers will also consider your deductible. This is the amount you pay out of pocket when you file a claim. A lower deductible means you're on the hook for less if something happens, but it will result in a higher monthly rate.

Other Factors

While not as prominent in the decision, there are several other factors that an insurance company may consider when determining your rate, including:

  • Occupation
  • Housing situation
  • Previous insurance coverage (specifically, whether you've had a gap in coverage)
  • Driving experience
  • Discount eligibility

Can Credit Scores Affect Car Insurance Rates?

According to FICO, 95% of auto insurers use what's called a credit-based insurance score to help determine your rate. That's because studies have shown that people with lower credit scores tend to file more claims, and your credit score is also predictive of the likelihood that you'll pay on time.

The only states where insurers don't consider your credit history include California, Hawaii and Massachusetts, where the practice has been banned.

Even if you live in a state where insurers are allowed to use this specialized type of credit score, they typically can't use the score as the sole reason for raising your rate or denying, canceling or refusing to renew a policy. That said, having a low credit score means you could miss out on savings.

How to Get a Good Price on Car Insurance

Now that you understand what goes into the decision-making process for car insurers, here are some tips to help you qualify for a lower rate.

Shop Around

One of the best things you can do to score a low rate is to shop around and compare quotes from several insurers. This process could save you hundreds or even thousands of dollars, depending on where you live.

As you do this, though, make sure you're comparing apples to apples. Some insurers may have different defaults for coverage levels, and discounts and other factors can vary from company to company. Also, consider reading reviews about each company before you apply to make sure you get good value for your money.

Ask About Discounts

If you apply for a quote online, you may see some discounts during the process. However, it may be wise to call the company to see if there are more that aren't listed. Again, each insurer can vary in what they offer and how much you can save, but getting even a small percentage knocked off your rate could make a difference.

Bundle Your Policies

If you own more than one vehicle, own a home or are renting, getting all of your insurance policies from the same company can help you save money. Those savings could range from 20% to 30%.

Improve Your Credit Score

If your credit isn't in great shape, look for ways to improve it before you buy a policy. Get a copy of your credit report and credit score and look for areas that need work. Also, focus on some of the more significant factors that go into your credit score.

For example, if you're behind on any payments, get caught up as quickly as possible and pay on time going forward. Also, if you have high credit card balances, work on paying them down.

Finally, consider using Experian Boost to include your utility and phone payments in your credit score. If it helps, you'll see the new-and-improved score immediately.

Check Insurance Costs Before You Buy

Because some cars are more expensive to insure than others, this should be a part of your decision when determining which vehicle to buy. Do some research on your make and model of choice and, if you're flexible, compare the insurance costs to similar options.

Raise Your Deductible

Increasing your deductible eliminates some of the risk for the insurance company, so you can generally expect a slightly lower rate. That said, consider raising your deductible only if you're confident you'll be able to pay it in the event of a claim without causing financial distress.

Avoid Getting Complacent With Your Car Insurance

Car insurance rates are never set in stone, and the factors that determine yours can change over time. And while you may get extra benefits for being loyal to your local grocery store, favorite airline or retailer, that's not always the case with car insurers.

As such, it may be a good idea to check in on your car insurance rate every year or two. Consider shopping around a bit to make sure you still have the lowest rate possible. If not, it may be worth switching to take advantage of lower costs elsewhere.


Want to instantly increase your credit score? Experian Boost helps by giving you credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your score.

This service is completely free and can boost your credit scores fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.

Resources
Sign up for helpful tips, special offers and more!
You're signed up!
Our system is undergoing maintenance and will be available again soon.