Credit Checks: Auto Insurance's Hard Pull

Auto insurance companies will usually perform a credit check when providing a quote, but this will typically be a soft pull or soft inquiry that does not affect your credit score. A soft pull is when a company checks your credit report without your permission, for example, when a credit card company checks your credit to see if you qualify for certain offers. A hard pull or hard inquiry, on the other hand, is when a lender checks your credit history when making a lending decision, and this can lower your credit score.

Car insurance quotes are usually a soft pull, not a hard pull, and won't affect your credit score

When you're shopping for car insurance, the last thing you want is for your credit score to be affected by multiple credit checks. The good news is that car insurance quotes are usually a soft pull, not a hard pull, and won't impact your credit score.

A soft pull, or soft inquiry, is when a company checks your credit history as part of a background check or for other permissible purposes. This may occur, for example, when a credit card issuer checks your credit without your permission to see if you qualify for certain credit card offers. Soft inquiries are also used when creditors send potential customers pre-approved offers, and when employers check the credit history of job applicants. Checking your own credit score is also considered a soft pull. Soft pulls have no effect on your credit score, and you can have as many of them as you want without any negative consequences.

A hard pull, or hard inquiry, on the other hand, is when a financial institution, such as a lender or credit card issuer, checks your credit history when making a lending decision. This commonly takes place when you apply for a mortgage, loan, or credit card, and you typically have to authorize them. A hard inquiry has the potential to lower your credit score, and too many hard pulls are bad for your credit score.

Car insurance companies in most states use an applicant's credit score and credit history when calculating their premium. This is because studies have shown that people with lower credit scores tend to file more claims, making them higher-risk. However, getting a car insurance quote will usually only result in a soft pull on your credit history, so you can shop around for the best rates without worrying about your credit score being affected.

It's worth noting that while most car insurance companies do soft pulls, there are exceptions. Some companies do hard pulls, and it's unregulated, so it's up to each company how they code an inquiry. Additionally, while soft pulls don't affect your credit score, they will show up on your credit report, so you will be able to see who has made inquiries about your credit history.

A poor credit score can increase your car insurance rates more than a recent DUI

A low credit score can have a significant impact on your car insurance rates. In fact, it can increase your car insurance rates more than a recent DUI in some cases. While a DUI is a serious offence that results in an average auto insurance rate hike of 74%, a poor credit score can lead to even higher rates.

Your credit-based insurance score is used by insurers to determine how likely you are to file a claim and assess the risk of covering you. It is calculated based on factors such as payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. A low credit score suggests a higher risk of filing a claim, leading to higher insurance rates.

According to NerdWallet's 2023 rate analysis, drivers with poor credit pay, on average, 61% higher rates than those with good credit. This translates to an average increase of $1,180 annually. Additionally, a poor credit score can continually impact your car insurance rates, unlike traffic tickets, which typically drop off your record after three to five years.

To improve your credit-based insurance score and lower your insurance rates, you can take several steps, including paying your bills on time, paying off credit card debts, and reducing credit card balances. It's also important to limit hard credit inquiries and regularly review your credit report to identify areas for improvement.

While a poor credit score can significantly impact your car insurance rates, it's important to note that other factors, such as driving record and insurance history, also play a role in determining your rates. Therefore, it's beneficial to shop around and compare rates from multiple insurance companies, as each company weighs these factors differently.

A credit-based insurance score is not the same as a regular credit score

A credit-based insurance score is designed to predict the likelihood that you will file insurance claims that cost the insurance company more than it collects in premiums. A credit score, on the other hand, predicts the likelihood that someone will fall behind on their bills.

The scores also have different ranges. Most credit scores are between 300 and 850, while a credit-based insurance score might be between 200 and 997.

Credit-based insurance scores are calculated using information from your consumer credit report, including:

• Payment history of your credit accounts
• Accounts in collections
• Credit card balances and limits
• Age of your credit accounts
• Types of credit you use
• Amount of past-due debt
• Whether you have recently applied for credit

Credit scores are also based on your credit reports but consider factors such as:

• Payment history
• How you're using credit
• How long you've used credit
• Types of credit you're using
• Recent credit activity

Insurers have to consider more than just your credit-based insurance score when setting premiums. State laws generally don't allow insurance companies to decline applications or set rates based solely on a credit-based insurance score. Some states, including California, Hawaii, and Massachusetts, don't allow insurance companies to use scores at all.

While your credit score and credit-based insurance score are not the same, your credit score can be a good indicator of your credit-based insurance score. If you have a decent credit score, your credit-based insurance score is likely to be similar.

A credit-based insurance score is used to determine how likely you are to file a claim

A credit-based insurance score is a number that predicts how likely you are to file a claim on your insurance and the cost of that claim. It is calculated mainly from your credit history and is used by insurers to determine how big a risk you are to cover. The higher your score, the better.

These scoring models, created by data analytics companies like LexisNexis and FICO, have been proven to be accurate. A 2007 study by the Federal Trade Commission showed that credit scores are a good indicator of whether someone will file an insurance claim. A 2003 study from the University of Texas found that drivers with the worst insurance scores are twice as likely to file a claim as drivers with the best scores.

Insurers use credit-based insurance scores to predict the likelihood of a claim being filed, with a poor score usually resulting in higher insurance rates. While a credit-based insurance score is calculated from similar factors to a regular credit score, they are not the same. A credit score estimates the likelihood of you paying your debts, while a credit-based insurance score looks at the likelihood of you filing an insurance claim.

The factors used to create a credit-based insurance score are similar for LexisNexis and FICO but may differ in weighting. For example, FICO weighs insurance credit scores as follows:

• Payment history (40%): How you made payments on your debt, including frequency and the amount paid off.
• Outstanding debt (30%): The amount of debt you have.
• Credit history length (15%): The amount of time you have had a line of credit.
• Pursuit of new credit (10%): Whether you have recently applied for new lines of credit.
• Credit mix (5%): The kinds of credit you have, including credit cards, mortgages, or auto loans.

Based on these categories, the following could negatively affect your insurance credit score:

• Having little to no credit history.
• Too many hard credit inquiries. (A hard credit pull occurs when you apply for an auto, student, or personal loan, mortgage, or credit card.)
• High credit card balances compared with your credit limits (known as your credit utilisation).

While a credit-based insurance score is used to determine how likely you are to file a claim, it is only one factor that goes into an insurance quote.

California, Hawaii and Massachusetts don't allow insurers to use credit scores when determining car insurance rates

In most states, insurance companies can use credit-based insurance scores to determine eligibility and premiums for auto insurance. However, California, Hawaii, and Massachusetts have prohibited the use of credit scores when determining car insurance rates.

In California, insurance companies do not use credit-based scores or credit history for underwriting or rating auto policies, nor do they use them for setting rates for homeowners insurance. As a result, an individual's credit will not impact their ability to obtain or renew a policy, or how much they pay in premiums.

Hawaii has banned auto insurers from using credit ratings when setting standards, including underwriting standards and rating plans, which determine premiums. Credit history can, however, impact homeowners insurance in the state.

Massachusetts law forbids auto insurance companies from using credit information or credit-based insurance scores when setting rates, underwriting a new policy, or renewing an auto policy. Homeowners insurance rates also cannot be based on credit history.

While credit scores are not used in these three states, other factors are considered when determining car insurance rates. These factors can include age, gender, marital status, vehicle type, and discounts for bundling policies or safe driving.

Frequently asked questions