How does credit score impact your car insurance?
Credit impacts many different parts of your life — including your car insurance. While your credit score and your car insurance might seem like separate parts of your finances, studies show that drivers with poor credit pay significantly more for auto insurance than similar drivers with better credit. Bankrate’s insurance editorial team looked into how insurance companies use credit information to set the cost of coverage for Americans.
Does credit affect car insurance rates?
In the strictest sense, your credit score does not affect car insurance rates. Instead, insurance companies assign customers “insurance scores,” which use credit information to calculate a customer’s likelihood of filing claims.
“When you apply for car insurance, the company checks your credit rating,” explains John Espenschied, owner of Insurance Brokers Group and an insurance expert with over 20 years in the industry. Customers belonging to lower credit tiers are expected to file more claims based on statistical analysis, so they receive lower insurance scores — and in turn, higher rates.
“If your score is low or if there is an indication that you might be living beyond your means,” Espenschied says, “it may affect whether you get coverage at all.”
But while insurance scores based on credit play a major role in how insurance companies set prices, many people aren’t aware of how closely their credit may be tied to their rates. Douglas Heller, Director of Insurance for the Consumer Federation of America (CFA), says, “The vast majority of Americans do not realize when they go shopping for insurance that their credit history is likely to have as much or more of an impact as if they have a drunk driving conviction.” Drivers with poor credit, he says, frequently pay significantly more for car insurance even with no history of accidents or violations.
You could be the safest driver on the road and find yourself paying literally hundreds and even thousands of dollars more than somebody with the exact same driving record but excellent credit.— Douglas Heller, Director of Insurance, Consumer Federation of America
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Powered by Coverage.com (NPN: 19966249)
Coverage.com, LLC is a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in states where it is licensed. Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.
What are credit-based insurance scores?
As noted, car insurance companies often use your insurance score to quickly and easily identify the level of risk you might present as a policyholder. In particular, insurers employ insurance scores to determine how likely you are to file a claim in the future, costing them money.
How are insurance scores different from credit scores? “Largely, they’re not,” Heller says. “From a real-world perspective, credit-based insurance scores are exactly what they sound like. They’re based on your credit history.”
To calculate a credit-based insurance score, your insurance company reviews your credit report to assess your risk in a simple numerical form. Insurers rely on the same factors that go into a FICO score — like total debt, payment history and the length of your credit history — to arrive at your insurance score.
Insurance companies don’t share their insurance scoring models, so there’s no universal tier system for insurance scores. However, because they’re based on the same data as credit scores, having a lower credit score will generally translate to a less favorable insurance score.
Can you check your credit-based insurance score?
Unlike credit reports, insurance scores aren’t required to be available to consumers. If you’d like to know your insurance score, you can reach out to your insurance agent or carrier to request it — but there’s no guarantee that the request will be fulfilled. And because insurance scoring systems vary between companies, it may be harder to interpret the significance of your insurance score compared to your credit score, which follows a more standardized tier system.
Instead, you may want to focus on understanding your credit score, since it’s more readily available and is based on the same information used to calculate your insurance score. If you’re struggling to get out from under a hefty car insurance bill, getting your credit up could make a difference.
Does an insurance quote hurt your credit score?
Requesting car insurance quotes won’t hurt your credit score. Although insurance companies will typically look at your credit when issuing a quote, they’ll do this by performing what’s known as a soft credit check. This is different from the hard inquiry that can cause your credit to dip after a loan or credit card application. In fact, a soft check won’t even show up on your credit report, and it won’t hurt your credit.
Does car insurance build credit?
While credit affects car insurance rates in most states, the inverse is not true: paying for car insurance does not build credit. Your insurance company won’t report your premium payments to credit reporting bureaus, so they won’t show up on your credit report and won’t be factored into your credit.
What you can do about your credit’s impact on your car insurance
The use of credit-based insurance scores in car insurance pricing has different results for every driver. If your credit rating is good to excellent, you’re likely to pay some of the lowest car insurance rates, all other factors being equal. But if you’re struggling to find affordable auto coverage, your credit score could be the invisible driver of your high rates.
Here’s what to do about it:
- Don’t underestimate the power of comparison shopping: “Everybody should be shopping right now,” Heller says. But for drivers with fair or poor credit, it’s even more important, because the range of available car insurance rates for drivers with low credit is much greater. “You can actually save much more if you have low credit.”
- Consider working with an independent insurance agent: “Some good agents may be very helpful and know about smaller companies or more specific policies for your situation,” says Michael DeLong, Research and Advocacy Associate at CFA.
- Wait to drop coverage: “Always shop for savings with the coverage that you really prefer before cutting your coverage,” Heller says. While cutting coverage may be the only practical option for some drivers, it’s better to start by seeing if you can find a better price on coverage you want to keep.
- Build your credit: While it may not solve your short-term budget problems, improving your credit could lower your rates over time.
- Speak up about discrimination: While the use of credit information in insurance pricing is legal in most states, discrimination on the basis of race and other protected factors is not. If you feel you’re being treated unfairly by an insurer, DeLong says, reach out to your state’s insurance department or to media outlets.
Frequently asked questions
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Outside of California, Hawaii and Massachusetts, the vast majority of car insurance companies check customers’ credit scores and use their credit information — in the form of insurance scores — to set premiums. However, some insurers are moving away from the use of credit scores, including usage-based insurance companies like Root. Currently, only a few companies like CURE Insurance cut out credit entirely.
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Several factors impact your credit score beyond whether you make your payments on time. These include how many accounts you have, how long they have been open and how many recent inquiries you have on your account. Late payments, high outstanding balances and accounts in collection can all negatively impact your score, too.
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Lenders may use one of two types of inquiry when running your credit. A hard inquiry (also known as a “hard pull” or a “hard check”) stays on your report permanently and can temporarily lower your credit score. These are often run for loan applications or utility enrollment. Soft inquiries, which commonly include insurance quotes and credit monitoring insurance, do not impact your FICO score.
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The Fair Credit Reporting Act (FCRA) entitles each person to a free copy of their credit report each year. This allows you to review the report for any mistakes or inaccuracies that could harm your score. That said, you can also obtain free weekly credit reports from the three major credit bureaus — Experian, TransUnion and Equifax — at annualcreditreport.com. If you see any inaccuracies, be sure to report them immediately to the relevant credit bureau.
