Haris Ashley
Credit scores are a key factor in determining insurance rates, with most insurers using credit checks to create a credit-based insurance score to set your rate. This is because credit scores are believed to indicate how risky an individual is to insure. However, some insurers do not use credit scores to set rates or approve or renew policies, and there are even a handful of companies that sell auto insurance with no credit check. In addition, certain states have laws that prohibit the use of credit history in auto insurance ratings.
| Characteristics | Values |
|---|---|
| Whether insurance companies check credit reports | Most insurance companies do check credit reports, but some do not |
| Whether credit checks affect credit scores | Soft credit checks do not affect credit scores |
| Whether credit checks affect insurance rates | Credit checks can affect insurance rates, but other factors are also considered |
| Whether credit checks are used to approve or renew insurance policies | Credit checks are used to help decide whether to sell insurance and at what rate |
| States that ban or limit the use of credit scores for insurance rates | California, Hawaii, Maryland, Massachusetts, Michigan, Oregon, Utah |
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What You'll Learn
How credit scores impact insurance rates
Credit scores can significantly impact insurance rates, with most insurers using credit checks to create a credit-based insurance score to help set insurance rates. While a handful of insurance companies do not use credit scores to set rates or approve or renew policies, 92% of insurers consider credit when calculating auto insurance premiums.
In states that allow it, most auto insurance companies will check credit-based insurance scores as part of the underwriting process. However, some companies provide auto insurance without a credit check, basing premiums on other factors, such as driving behaviour and the number of miles driven.
While working with an insurer that doesn't require a credit check may seem appealing to those with poor credit histories, it doesn't necessarily guarantee lower insurance rates. Improving credit scores may result in lower insurance costs in the long run. Credit health can affect auto insurance rates, but insurance companies are generally not allowed to base approvals and rates solely on credit scores. Other factors, such as driving history, discounts, and vehicle type, are also considered.
Additionally, insurance companies cannot charge higher premiums or deny coverage based solely on specific negative events reflected in a credit report. These protected events include major illnesses, the death of a close relative, temporary job loss, divorce, and identity theft. Individuals whose credit has been impacted by such events can request reconsideration of their premium by the insurance company.
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States that don't allow credit checks for insurance
Credit-based insurance scores are used by insurance companies to better understand their risk when approving a policy. These scores are based on an individual's credit report and are designed to predict the likelihood of filing a claim that will lead to losses for the insurer. While this is a common and permitted rating factor in most states, some states have banned the use of credit scores in setting insurance rates.
California, for instance, has established regulations through Proposition 103 to bar discriminatory practices against policyholders based on their credit history. Other states that have prohibited the use of credit scores in auto insurance rating include Hawaii, Maryland, Massachusetts, Michigan, Oregon, Utah, and Washington. In these states, insurance companies cannot use credit-based scores or an individual's credit history when offering or renewing a policy, or deciding on premium charges.
It is worth noting that even in states that restrict the use of credit scores for auto or home insurance, there may not be laws restricting their use for life insurance. Additionally, while credit history is not used, insurance companies may still consider other factors such as claims history, vehicle or home being insured, and driving habits when determining rates.
Attempts have been made at the national level to pass the Prohibit Auto Insurance Discrimination (PAID) Act, which would end the use of credit history in premium calculation, but these efforts have been unsuccessful so far. As a result, the decision to ban or restrict the use of credit scores in insurance remains at the state level, with states constantly reviewing and revising their stance on the issue.
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Companies that don't check credit scores
While most insurance companies use credit scores to set rates and approve or renew policies, there are a few companies that sell traditional auto insurance with no credit check. These include CURE, Dillo, and Empower. However, these companies only operate in select states, and it can be challenging to find insurance companies that don't use credit as a rating factor.
In some states, insurance companies are prohibited from using credit history to determine premiums. Currently, California, Hawaii, Maryland, Massachusetts, Michigan, Oregon, and Utah have strict limitations on the use of credit for auto or homeowners insurance. These states either ban the practice outright or have partial bans restricting how insurance companies can use credit history. For example, Oregon doesn't allow companies to cancel or refuse to renew coverage based on a policyholder's credit but can use it when underwriting a new policy.
Even in states where credit history is not prohibited, insurance companies typically only perform soft credit inquiries, which do not adversely affect your credit score. Additionally, insurance companies don't look at the same credit scores that lenders use for mortgages or auto loans. Instead, they use insurance scores based on various factors, including credit history, to determine policyholders' risk levels.
If you have poor credit, there are still ways to secure affordable insurance premiums. Telematics-based insurance is an option for drivers with bad credit to save on auto insurance premiums. Car insurance providers also often offer discounts for installing anti-theft systems or bundling multiple insurance types. While improving your credit score may be the best option for long-term savings, there are insurance options available for those with less-than-perfect credit.
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Improving credit scores to save on insurance
While not all insurance companies use credit scores to set rates or approve or renew an auto policy, most insurers use credit checks to create a credit-based insurance score to help set your rate. This is considered a soft credit inquiry, which might be noted on your credit report but is unlikely to influence your score.
Your credit score is one of the most significant factors in your car insurance costs. Improving your credit score, even marginally, could save you hundreds in auto insurance payments every year. For example, moving up from a poor to an average credit score can save you 20% (an average of about $600 annually). Even moving from good to exceptional credit can save an average of 26% or $420 every year.
- Review your credit report: Order free copies of your credit report from each of the three major credit bureaus and review them for errors. Common errors include incorrect reporting or the same debt appearing more than once, which can lower your scores. Follow each agency's instructions for disputing errors on your credit report, and you may see a change in your scores within a few months.
- Pay your bills on time: Your payment history significantly affects your credit scores, making up 35% of the FICO scoring model. If you've struggled to pay your bills on time in the past, consider setting up automatic payments or calendar alerts to avoid late payments.
- Utilize unused credit cards sparingly: Instead of closing an unused credit card, use it sparingly and make timely payments. This approach can help improve your credit history and minimize your credit utilization ratio. Your credit utilization ratio is a measurement of how much credit you have available compared to how much you use. Many finance professionals recommend that you utilize no more than 30% of your total available credit at any given time.
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Soft credit inquiries and their impact
Soft credit inquiries, also known as soft credit pulls or soft credit checks, refer to situations where individuals or companies check your credit report without your permission. This often occurs during background checks or when companies want to see if you qualify for certain financial products or services. Soft inquiries can also occur when you check your own credit report.
Soft inquiries are considered less concerning than hard inquiries because they do not impact your credit score. Credit scoring models and lenders do not factor soft inquiries into their calculations when assessing your creditworthiness. This is because soft inquiries are not connected to a specific application for new credit and are not formal credit applications. As a result, soft inquiries may or may not be recorded in your credit reports, and even if they appear, they won't affect your scores.
On the other hand, hard inquiries, also known as hard pulls or hard credit checks, occur when financial institutions, lenders, or credit card issuers check your credit as part of a lending decision or when you apply for a mortgage, loan, or credit card. These types of inquiries are typically authorized by the individual and are considered part of the credit application process. Hard inquiries can temporarily lower your credit score by a few points and are generally noted in your credit reports for about two years.
It's important to note that soft inquiries can still provide valuable information to companies or creditors. They can review your credit report and score to assess how well you are managing your credit and determine the risk associated with lending to you. However, this assessment is not connected to your credit score and does not impact it directly.
While soft credit inquiries may not impact your credit score, it is worth reviewing your credit reports regularly. You can request free copies of your credit report from major credit bureaus, such as Experian, Equifax, and TransUnion, and check for any errors or discrepancies. Keeping an eye on your credit reports can help you identify any unauthorized hard inquiries or potential identity theft issues, allowing you to take prompt corrective actions.
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Frequently asked questions
Yes, most insurance companies do check credit reports. They use credit-based insurance scores, which are calculated using many of the same inputs as credit scores, to help set your rate.
No, these checks are considered soft credit inquiries, similar to when a company checks your credit to see if you qualify for a financial product. While it may appear on your credit report, it does not negatively impact your score.
Yes, a handful of insurance companies do not use credit scores to set rates or approve or renew policies. Some companies that sell auto insurance with no credit check include CURE, Dillo, and Empower. Additionally, certain states have laws prohibiting the use of credit information in insurance pricing.
