Credit Letters: A Necessary Step In The Auto Insurance Game

Auto insurance companies may issue credit letters, but this is not a common practice. While your credit history can impact your insurance rates, most companies do not report payment histories to credit agencies, so maintaining auto insurance and paying your premiums on time will not significantly impact your credit score. However, it's important to note that failing to pay your auto insurance premiums can lead to debt collection efforts, which can damage your credit.

Credit-based insurance scores

It's important to note that insurance companies cannot solely rely on credit-based insurance scores to make decisions about coverage and rates. State laws may limit or prohibit the use of these scores in auto insurance decisions. Additionally, insurance companies consider other factors, such as driving records, location, vehicle type, and insurance history, when determining rates.

While credit-based insurance scores can impact car insurance rates, they are just one piece of the puzzle. Other factors, such as driving record and insurance history, also play a significant role in determining rates. Individuals can take steps to improve their credit-based insurance scores, such as maintaining a good payment history, keeping credit card balances low, and strategically applying for new credit.

How credit scores impact insurance rates

Credit scores can have a significant impact on insurance rates, with those with poor credit often facing substantially higher premiums than those with good credit. This is because insurers believe that individuals with a better credit history are less likely to file a claim, and so they are rewarded with preferential rates. Conversely, those with a poorer credit history are seen as higher-risk and are therefore charged more.

In most states, insurance companies can use credit scores when reviewing applications or setting premiums. However, this is not the case in California, Hawaii, Massachusetts, and Michigan, which ban the use of credit scores in determining insurance rates. Washington also appears on some lists of states that ban credit scores for this purpose.

When determining insurance rates, insurers use a credit-based insurance score, which is different from a regular credit score. This score is based on a consumer's credit report and is designed to predict the likelihood of the consumer filing insurance claims that cost the company more than it collects in premiums. Factors that influence this score include outstanding debt, credit history length, credit mix, and payment history.

While a credit score can impact insurance rates, it is important to note that it is not the only factor considered by insurance companies. Other criteria, such as driving record, location, demographics, and vehicle type, also play a role in determining insurance premiums.

Improving a credit score can take time, but it can be beneficial in ensuring individuals get the lowest possible rate for their insurance policy. Paying bills on time, maintaining old lines of credit, and keeping an eye on credit utilization ratio are some ways to enhance a credit score.

How to improve your credit score

Improving your credit score takes time and effort, and there's no one-size-fits-all solution. Here are some strategies to help you improve your credit score:

• Pay your bills on time: Payment history is the biggest factor in calculating your credit score, accounting for 35% of your score. Late payments can have a significant negative impact and stay on your credit report for up to seven years. Set up automatic payments or reminders to ensure you never miss a payment due date.
• Keep your credit utilisation rate low: Your credit utilisation rate is the amount of revolving credit you're using divided by your total credit limit. Lenders prefer a credit utilisation rate of 30% or lower, with lower rates indicating positive credit behaviour. You can reduce your credit utilisation rate by paying down credit card balances, increasing your credit limit, or getting a consolidation loan.
• Diversify your credit mix: Credit mix refers to the variety of account types you have, such as credit cards, student loans, mortgages, and other loans. A diverse credit mix, along with a solid payment history, demonstrates to lenders that you understand credit management.
• Limit new credit applications: Every time you apply for new credit, a hard inquiry is made on your credit report, which can negatively impact your score. Hard inquiries remain on your report for up to two years and affect your score for 12 months. Only apply for new credit when necessary and consider the impact on your credit utilisation rate.
• Maintain a long credit history: The length of your credit history is a factor in your credit score. Avoid closing old accounts, even if you no longer use them, as this can shorten your credit history. Keeping old accounts open demonstrates your ability to manage credit over time.
• Dispute credit report errors: Inaccurate information on your credit report can negatively impact your score. Regularly review your credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion) and dispute any errors or signs of identity theft or fraud.
• Become an authorised user: If you're new to credit or rebuilding your score, consider becoming an authorised user on a family member or friend's credit card account with a positive payment history and low credit utilisation. This can have an immediate positive impact on your score.
• Pay credit card balances strategically: Keep your credit card balances low by paying them down before the billing cycle ends or making multiple payments throughout the month. This will help maintain a low credit utilisation rate and reflect well on your credit report.
• Get credit for rent and utility payments: Services like Experian Boost can help you get recognised for on-time rent and utility payments, which are not traditionally reported to credit bureaus. This can be an easy way to build a positive payment history.
• Consider credit counselling: If you're struggling with significant debt, credit counselling services can provide guidance on managing your debt and improving your credit habits. These services are often available at low or no cost through nonprofit organisations.

How auto insurance payments affect credit score

Auto insurance companies often use credit-based insurance scores to help set your rate and decide whether to take you on as a policyholder. These scores are based on consumer credit reports and are designed to predict the likelihood of a future accident or claim. They are different from the credit scores calculated by FICO and VantageScore, which creditors use to predict the risk of someone missing a payment by at least 90 days.

Credit-based insurance scores are only one of many factors that go into determining your auto insurance rate. Some other factors include:

• Demographics (age, gender, marital status)
• The type of vehicle you're insuring
• The types of insurance you want, coverage amounts, and the deductibles
• Your driving record
• Where you live

In some states, such as California, Hawaii, Washington, Massachusetts, and Michigan, insurers are prohibited from using credit information to determine auto insurance rates. In these states, your credit score will not affect your insurance rates, regardless of whether it is good or bad.

While getting an insurance quote won't hurt your credit score, applying for a new loan or credit card can result in a hard inquiry that may negatively impact your score for up to two years.

To improve your credit-based insurance score, you can:

• Pay your bills on time
• Decrease your credit utilization rate by paying down credit card debt
• Check your credit report for accuracy and keep your credit history long-standing
• Avoid missing payments, having accounts sent to collections, or filing for bankruptcy

No-credit-check car insurance

In the US, four states – California, Hawaii, Washington, and Massachusetts – prohibit insurance companies from factoring in credit scores when determining car insurance rates. In some other states, such as Maryland, Utah, and Oregon, insurance companies cannot use credit scores as a basis for cancelling or refusing to renew an existing policy.

Some insurance companies, such as CURE, Dillo, and Empower, provide auto insurance with no credit check. Additionally, there are two types of insurance that may not require a credit check: usage-based insurance and telematics insurance. Usage-based insurance companies, like Root and MetroMile, 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 determine your premium.

It's important to note that purchasing car insurance from a company that doesn't check credit doesn't necessarily mean you'll pay a lower rate. Even if you have a poor credit history, you can still save on your auto insurance by taking advantage of discounts offered by some insurance companies, such as multi-policy bundling, paying your policy in full, or insuring multiple cars.

Frequently asked questions