Alyssa Lane
A bad credit report can have a significant impact on auto insurance rates. While it may not be the primary factor, it is one of many variables that auto insurance companies consider when deciding whether to take on a policyholder and determining the premium they will charge. A poor credit score can lead to higher insurance rates, with individuals with lower credit scores being perceived as higher-risk and more likely to file claims. On the other hand, a good credit score can result in lower insurance rates as individuals with higher credit scores are seen as less likely to submit claims.
| Characteristics | Values |
|---|---|
| Credit-based insurance scores | Used by auto insurance companies to help decide whether to take on a policyholder and the premium they'll pay |
| Credit-based insurance scores vs. credit scores | Credit-based insurance scores are different from credit scores; credit scores try to predict the likelihood that a consumer will be 90 days late on a payment in the next 24 months, whereas credit-based insurance scores try to predict the likelihood that a consumer will file insurance claims that will cost the company more money than it collects in premiums |
| Credit-based insurance scores and insurance companies | Auto insurance companies can and often do consider your credit history or use a credit-based insurance score before offering you coverage; however, it is only one piece of the puzzle as insurance companies are generally prohibited from making a decision solely based on your credit |
| Credit-based insurance scores and state laws | Some states strictly limit or entirely prohibit insurance companies' use of credit information in determining auto insurance rates; in these states, your credit score won't affect your insurance rates no matter how good or bad it is |
| Factors affecting car insurance rates | Demographics, type of vehicle, types of insurance, insurance company, driving record, location, discounts |
| Improving credit scores | Pay bills on time, decrease credit utilization rate, check credit report for accuracy, don't miss payments, make on-time payments, pay down debts, use revolving and installment credit, apply sparingly for new credit |
| Credit inquiries | Getting insurance quotes doesn't hurt your credit-based insurance score or other credit scores; when an insurance company checks your credit, a record of the credit check (a soft inquiry) will be added to your credit file, but soft inquiries won't impact your credit scores |
What You'll Learn
- Credit-based insurance scores are different from credit scores
- Credit-based insurance scores predict likelihood of filing insurance claims
- Credit history is one of many factors determining insurance rates
- Some states prohibit credit history from influencing insurance rates
- Improving credit score can lower insurance costs
Credit-based insurance scores are different from credit scores
Firstly, they are used by different types of companies. Credit-based insurance scores are used by insurance companies to help set your premiums, while credit scores are used by creditors to decide whether to approve applications and choose the terms of your account.
Secondly, they predict different outcomes. Credit-based insurance scores predict the likelihood that you will file insurance claims that cost the company more than it collects in premiums. On the other hand, credit scores predict the likelihood that a consumer will be 90 days late on a payment in the next 24 months.
Thirdly, the score ranges are not the same. Most credit scores range from 300 to 850, while credit-based insurance scores can vary, for example, the LexisNexis Attract score ranges from 200 to 997.
Fourthly, insurers have to consider more than just your credit-based insurance score when deciding on applications or renewals, or setting your rates. State laws generally do not allow insurance companies to decline applications or set rates based solely on a credit-based insurance score. Some states do not allow insurance companies to use scores at all. In contrast, creditors can decline your credit application, close your account, or lower your credit limit if you have a low credit score.
Finally, while you can easily check your credit scores, it is not as straightforward to check your credit-based insurance score. You might be able to get your credit-based insurance score by asking your insurance agent, but this is not always possible.
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Credit-based insurance scores predict likelihood of filing insurance claims
Credit-based insurance scores are designed to predict the likelihood that you'll file insurance claims that cost the insurance company more than it collects in premiums. These scores are based on your consumer credit report and are used by auto insurance companies to help them decide whether to take you on as a policyholder, as well as the premium you'll pay.
Credit-based insurance scores are different from the credit scores that creditors use, such as the FICO® and VantageScore® models. While credit scores try to predict the likelihood that a consumer will be 90 days late on a payment in the next 24 months, credit-based insurance scores focus on the likelihood of filing costly insurance claims.
Credit-based insurance scores typically consider various factors related to an individual's credit history and behaviour. These factors include payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. The specific weighting of these factors may vary between different scoring models.
It's important to note that credit-based insurance scores are just one piece of the puzzle for auto insurance companies. They also consider other factors, such as demographics, vehicle type, insurance coverage options, and discounts offered. Additionally, some states have laws that limit or prohibit the use of credit information in determining auto insurance rates.
While a good credit-based insurance score can positively impact your auto insurance rates, it's not the sole determinant. Auto insurance companies use a range of criteria to set rates, including driving records, location, vehicle type, insurance types, and discounts offered.
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Credit history is one of many factors determining insurance rates
Credit history is one of many factors that auto insurance companies consider when determining insurance rates and your eligibility for coverage. While a higher credit score generally decreases your car insurance rate, it is not the only element that influences the overall cost of your insurance.
In most states, insurance companies use credit-based insurance scores, which are different from the credit scores calculated by FICO or VantageScore. These credit-based insurance scores are designed to predict the likelihood of an individual filing insurance claims that will cost the company more money than it collects in premiums. In contrast, traditional credit scores predict the likelihood of a consumer missing a payment within the next 24 months.
Although a poor credit score can negatively impact your insurance rates, it is essential to understand that it is just one piece of the puzzle. Insurance companies also consider various other factors, such as your driving record, location, demographics, vehicle type, insurance coverage, and available discounts. Additionally, some states, including California, Hawaii, Massachusetts, Michigan, and Washington, prohibit or strictly limit the use of credit information in determining auto insurance rates.
When determining insurance rates, insurance companies typically assess the following factors related to your credit history:
- Outstanding debt or the amount of current debt.
- Length of credit history, reflecting how long you have had open lines of credit.
- Credit mix, including different types of credit such as auto loans, mortgages, and credit cards.
- Payment history, indicating your track record of managing debt payments over time.
- Pursuit of new credit, reflecting recent attempts to open new lines of credit.
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Some states prohibit credit history from influencing insurance rates
In the United States, credit-based insurance scores are used by auto insurance companies to help them decide whether to offer someone an insurance policy and the premiums for the policy. These scores are based on one of the consumer's credit reports. However, this practice is not allowed in all states.
California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah have strict limitations on the use of credit with auto or homeowners policies. In these states, insurance companies cannot use credit-based scores or credit history for underwriting or rating auto policies, or setting rates for homeowners insurance. As a result, an individual's credit will not impact their ability to get or renew a policy, or how much they pay in premiums.
In Maryland, auto insurers can use credit history to help determine the rate on a new policy, but they cannot use it to deny the initial application, cancel a policy, refuse to renew a policy, or increase premiums during a renewal.
In Oregon, insurers can consider an applicant's credit when deciding whether to initially offer an auto insurance policy, but it cannot be the only deciding factor. They also cannot cancel or refuse to renew a policy because of an individual's credit.
In Utah, insurers can use credit information when initially underwriting an auto policy, but it cannot be the only factor used to make the decision. After a driver has been a customer for 60 days, the company cannot use credit information to cancel or refuse to renew a policy or decline coverage for a new vehicle that the driver or select household members own.
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Improving credit score can lower insurance costs
Improving your credit score can help you save money on auto insurance. While auto insurance companies use a range of factors to determine your premium, credit-based insurance scores are one of them. These scores are based on your consumer credit reports and are designed to predict the likelihood of you filing insurance claims that will cost the company more money than it collects in premiums.
If you have a low credit score, taking steps to improve it will likely bump up your credit-based insurance score. Here are some ways to improve your credit score:
- Pay your bills on time every month.
- If you miss a payment, bring your account up to date as soon as you can.
- Reduce your credit card debt to decrease your credit utilization rate.
- Check your credit report for any inaccuracies and ensure it is up to date.
- Keep hard credit inquiries to a minimum. Hard inquiries occur when you apply for a loan or credit card, and too many of them can negatively impact your score.
- Monitor your score regularly to catch any errors or signs of identity theft early on.
- Maintain old lines of credit to lengthen your credit history, which accounts for 15-20% of your score.
- Be mindful of your credit utilization ratio, which is the amount of credit you're using compared to your total available credit. Aim to use no more than 30% of your available credit at any given time.
By implementing these strategies, you can improve your credit score, which may lead to lower insurance costs.
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Frequently asked questions
Yes, a bad credit report can affect auto insurance. A higher credit score typically decreases your car insurance rate, while poor credit can lead to a significant increase in insurance costs.
A low credit score can increase your car insurance rate by up to 114% compared to someone with an excellent credit score. The difference in insurance rates between poor and good credit can be over $70 per month.
Almost every major car insurance company checks your credit score before offering a binding quote. However, some states prohibit or limit the use of credit scores in determining insurance rates.
Improving your credit score can be done by making bill and debt payments on time, keeping credit inquiries to a minimum, regularly monitoring your score, maintaining old lines of credit, and keeping a low credit utilisation ratio.
