Credit Checks: A Necessary Evil For Auto Insurance Companies?

Do all auto insurance companies check your credit? The answer is no. While most insurers use credit checks to create a credit-based insurance score to help set your rate, some insurers provide auto insurance with no credit check. This is particularly appealing if you have a poor credit history. However, purchasing car insurance from a company that doesn't check credit doesn't necessarily mean you'll pay a lower rate than you would with a company that does.

Some auto insurance companies don't check credit scores

While most auto insurance companies do check credit scores, there are a few that don't. These companies include CURE, Dillo, and Empower. Additionally, some states have outlawed the use of credit scores in pricing, including California, Hawaii, Maryland, Massachusetts, and Michigan.

If you live in a state that allows insurance companies to check credit scores and are looking for a company that doesn't factor in credit, you may want to consider usage-based insurance or telematics insurance. Usage-based insurance companies like Root and MetroMile do not check credit scores, as they base your monthly premium on the distance you drive rather than a fixed annual or semi-annual rate. Telematics insurance uses a telematics device or mobile app to track your driving habits and set your premium accordingly.

It's important to note that even if an insurance company doesn't check your credit score, they may still consider other factors such as your driving record, age, gender, and marital status when determining your premium. Additionally, usage-based insurance may not be ideal for drivers who travel longer distances, as it can be more expensive than traditional insurance in those cases.

When choosing an auto insurance company, it's always a good idea to shop around and compare rates and coverages to find the best option for your needs.

Credit-based insurance scores are different from those used by creditors

Credit-based insurance scores are calculated by data analytics companies like LexisNexis and FICO. They are designed to predict the likelihood of an individual filing insurance claims that will cost the insurance company more than the premiums they pay. This is different from the purpose of a credit score used by creditors, which predicts the risk of someone missing a payment by at least 90 days.

Credit-based insurance scores and credit scores are calculated using similar information, but the weighting of these factors differs. Credit-based insurance scores consider the following:

• Payment history (40%)
• Outstanding debt (30%)
• Credit history length (15%)
• Pursuit of new credit (10%)
• Credit mix (5%)

Credit scores, on the other hand, are calculated using five categories, with different weightings:

• Payment history
• Credit utilisation rate (how much of your available credit you are using)
• Length of credit history
• Types of credit used
• Recent credit activity

Credit-based insurance scores are also harder to check than credit scores. While credit scores can be easily accessed through credit reports, credit-based insurance scores may require contacting an insurance agent or getting an insurance quote.

Credit-based insurance scores are used by insurance companies to help set premiums, while creditors use credit scores to decide whether to approve applications and choose the terms of an account.

Soft credit checks don't impact your credit score

Soft credit checks, also known as "soft pulls" or "soft credit checks", do not impact your credit score. They are usually performed when you apply for a line of credit to give lenders an overview of the basic details of your credit score. Soft credit checks are also carried out when you request a copy of your credit report or check your credit score. They are visible to you and will stay on your credit report for 12 to 24 months.

In contrast, hard credit checks, or "hard pulls", are performed when you have completed a full application for a credit card or loan, and can lower your credit score by a few points. They typically stay on your credit report for about two years.

Soft credit checks are the type of credit check that auto insurance companies carry out when providing a policy quote. These checks are only carried out with your consent.

Credit history is one of many factors used to determine insurance rates

Credit history is one of many factors used by auto insurance companies to determine insurance rates. While your credit score may not impact your rate directly, insurance companies may look at your credit history and credit-based insurance score to help determine how likely you are to file claims. This is because drivers with poor credit have been found to be statistically more likely to file claims and are therefore considered higher-risk to insure.

In states where it is allowed, most car insurance companies consider your credit score when they provide a policy quote. During the quoting process, a licensed agent will gather basic information such as your full name, date of birth and physical address. This information is used by insurance companies to access consumer reports used to determine your credit-based insurance score, which is a rating factor used to calculate your rate.

It's important to note that these checks are only soft credit inquiries and do not adversely affect your credit score like a hard credit check would. In addition, insurance companies don't use the same scores that lenders use. The types of credit scores that lenders and credit card issuers use to evaluate your creditworthiness won't affect your insurance rates.

While credit history is one factor in determining insurance rates, other factors include your driving record, where you live, your age, gender, marital status, the type of vehicle you drive, and any discounts you may qualify for. Ultimately, it's a combination of these factors that helps insurance companies assess the risk you present as a driver and set your insurance rate accordingly.

Some states ban the use of credit scores in setting insurance rates

While most states allow insurance companies to use credit-based insurance scores to help them make decisions about whom to insure and how much to charge, some states have banned the use of credit scores in setting insurance rates. As of July 2024, there are eight states with strict limitations on the use of credit with auto or homeowners policies: California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah.

In these states, insurance companies are not allowed to use an individual's credit score to determine their premium. For example, in California, auto insurance companies do not use credit-based scores or an individual's credit history for underwriting or rating auto policies, or setting rates for homeowners insurance. As a result, an individual's credit won't impact their ability to get or renew a policy, or how much they pay in premiums.

Similarly, in Hawaii, auto insurers are banned from using credit ratings when setting standards, including underwriting standards and rating plans, which determine an individual's premiums. However, credit ratings can impact an individual's homeowners insurance. In Massachusetts, auto insurance companies are forbidden from using credit information or credit-based insurance scores when setting rates, underwriting a new policy, or renewing an auto policy.

In some other states, such as Maryland, Utah, and Oregon, insurance companies cannot legally use an individual's credit score as a basis for canceling or refusing to renew an auto insurance policy. However, insurance companies in these states can still use credit scores to determine an individual's premium.

The use of credit scores to set insurance rates is a controversial topic. Critics of the practice argue that it perpetuates economic and racial inequality and is biased against those without access to generational wealth. They also contend that it unfairly targets individuals who struggle financially due to circumstances beyond their control, such as unemployment, unexpected medical expenses, or natural disasters. On the other hand, insurance companies argue that credit-based insurance scores are necessary to properly evaluate risk and charge rates that align with an individual's true risk. They claim that not using credit-based scores could result in lower-risk individuals bearing some of the costs of higher-risk individuals.

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