Auto Insurance Applications: Understanding The Credit Score Impact

Applying for auto insurance does not affect your credit score. When an insurance company checks your credit, they perform a soft pull, which does not influence your credit score. However, your credit score can impact your car insurance rate. In most states, a higher credit score generally leads to lower insurance rates, while a lower credit score can result in higher rates. This is because insurance companies use credit-based insurance scores to assess the likelihood of an individual filing an insurance claim. It's important to note that some states, such as California, Hawaii, and Massachusetts, prohibit or limit the use of credit scores in determining auto insurance rates.

How credit scores affect insurance rates

Credit scores can have a significant impact on insurance rates, with higher scores often leading to lower premiums. This is because insurers believe that individuals with better credit histories are less likely to file claims, and they reward these customers with preferential rates. On the other hand, those with lower scores are seen as higher-risk and are usually charged more.

In most states, insurance companies use credit-based insurance scores when determining rates. These scores are based on consumer credit data and are calculated using factors such as outstanding debt, credit history length, credit mix, and payment history. While getting an insurance quote does not affect your credit score, having a higher score can help you secure lower rates.

The impact of credit scores on insurance rates varies across states. Some states, like California, Hawaii, Washington, Massachusetts, and Michigan, limit or prohibit the use of credit information in determining insurance rates. In these states, insurance companies base their rates on factors like driving records, location, and other characteristics.

It's worth noting that improving your credit score can take time, but it's beneficial in the long run, as it can help you get lower insurance rates and unlock other financial benefits.

Credit-based insurance scores vs regular credit scores

Credit-based insurance scores and regular credit scores are calculated using the same factors, but they are weighted differently. This is because they are used for different purposes: credit-based insurance scores are used to predict the likelihood of filing an insurance claim, whereas regular credit scores are used to predict the likelihood of paying debts.

Credit-Based Insurance Scores

Credit-based insurance scores are used by insurance companies to predict the likelihood that you will file insurance claims that cost the company more than it collects in premiums. These scores are based on credit reports and consider factors such as payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. The specific weighting of these factors may vary depending on the company issuing the score. For example, FICO weighs payment history at 40% and outstanding debt at 30%, while LexisNexis may weigh these factors differently. Credit-based insurance scores typically range from 200 to 997, with higher scores being better.

Regular Credit Scores

Regular credit scores, also known as VantageScores or FICO scores, are used by creditors to assess creditworthiness when individuals apply for loans, credit cards, mortgages, etc. These scores are also based on credit reports and consider factors such as payment history, credit utilisation, length of credit history, types of credit used, and recent credit applications. Regular credit scores typically range from 300 to 850, with higher scores indicating greater creditworthiness.

Differences

In addition to the different weighting of factors, credit-based insurance scores and regular credit scores serve different purposes and are used by different types of companies. Credit-based insurance scores predict the likelihood of filing an insurance claim, while regular credit scores predict the likelihood of falling behind on bill payments. The score ranges also differ between the two types of scores. It is important to note that personal information such as income, occupation, and location of residence is not considered when calculating credit-based insurance scores.

Improving your credit score

• Pay your bills on time: Payment history is the most important factor in determining your credit score. Making on-time payments can positively impact your credit score and insurance scores.
• Pay down credit card balances: Keep your overall credit utilization low. Aim for a credit utilization of 30% or less of your total credit limit. The lowest balances are associated with the highest credit scores.
• Don't close your oldest credit accounts: The length of your credit history also influences your score. Avoid closing old accounts as this will reduce your average account age and increase your credit utilization ratio.
• Diversify your credit mix: Having different types of credit, such as credit cards, loans, and mortgages, can improve your score.
• Limit new credit applications: Hard inquiries into your credit history can negatively impact your score. Only apply for new credit when necessary.
• Dispute inaccurate information: Inaccurate information on your credit report can negatively impact your score. Dispute any errors or signs of identity theft to improve your score.
• Become an authorized user: If you are new to credit, consider becoming an authorized user on a loved one's credit card account. Ensure the account has a positive payment history and a low credit utilization rate.
• Monitor your score regularly: Keeping a close eye on your credit score can help you take proactive measures to improve it and uncover any errors or signs of identity theft.
• Keep hard credit inquiries to a minimum: Hard credit inquiries occur when you apply for a line of credit and can negatively impact your score. If you are building your credit, consider spacing out your applications to leave room between hard inquiries.

How to get a better price on car insurance

Applying for auto insurance does not affect your credit score. When insurance companies review your credit during the quoting process, it is considered a soft inquiry and won't impact your actual credit score.

• Shop around for quotes: Prices vary from company to company, so it's worth getting at least three price quotes. You can contact companies directly, check their websites, or ask your state insurance department for comparisons of prices charged by major insurers.
• Buy insurance from a financially stable company: Check the financial health of insurance companies with rating agencies like AM Best and Standard & Poor's. This ensures that your insurer will be able to pay out claims.
• Compare insurance costs before buying a car: Car insurance premiums are based on the car's price, repair costs, safety record, and likelihood of theft. Insurers often offer discounts for features that reduce the risk of injuries or theft.
• Ask for higher deductibles: Deductibles are what you pay before your insurance policy kicks in. By opting for higher deductibles, you can lower your overall costs. For example, increasing your deductible from $200 to $500 could reduce your collision and comprehensive coverage costs by 15-30%.
• Reduce coverage on older cars: If your car is worth less than ten times the premium, purchasing collision or comprehensive coverage may not be cost-effective. Consider the value of your car and review your coverage at renewal to ensure it still meets your needs.
• Bundle your insurance policies: Many insurers offer discounts if you buy multiple types of insurance, such as homeowners and auto coverage, from them. You may also get a reduction if you insure more than one vehicle with the same company or if you're a long-time customer.
• Maintain a good credit record: Establishing a solid credit history can reduce your insurance costs. Most insurers use credit information to price auto insurance policies, and research shows that people who manage their credit effectively have fewer claims. Pay your bills on time, don't take on more credit than you need, and keep your credit card balances low.
• Take advantage of low-mileage discounts: Some companies offer discounts for driving fewer miles per year or carpooling to work.
• Ask about group insurance: Some insurers offer reduced rates for drivers who get insurance through their employers or certain groups or clubs.
• Seek out other discounts: You may be eligible for discounts if you have a clean driving record, take a defensive driving course, or have a young driver on your policy who is a good student.
• Improve your driving record: Maintaining a safe driving record is key to getting lower car insurance rates. Avoid accidents and moving violations, and consider taking a defensive driving course to reduce points on your license.
• Increase your deductibles: Opting for a higher deductible can lower your annual premium. Just make sure you have enough money set aside to pay the deductible if you need to make a claim.
• Improve your credit rating: Some insurance companies consider credit ratings when determining insurance premiums. Improving your credit score can potentially lower your insurance costs.
• Review your coverage: Consider dropping collision or comprehensive coverage if you're driving an older car that's not worth much. Also, review your coverage regularly to ensure it still meets your needs.
• Install anti-theft devices: You may be able to reduce your premiums by installing anti-theft systems, car alarms, or LoJacks in your vehicle.
• Speak to your agent: Ask about any special discounts the company may offer, such as for military personnel or employees of specific companies.
• Switch to pay-as-you-go insurance: If you're a safe, low-mileage driver, consider usage-based insurance programs like Allstate's Drivewise. These programs track your driving through a device installed in your car and offer discounts for safe driving.
• Research additional discounts: Look for discounts such as paying the full annual or six-month premium at once, receiving e-bills, or being a member of particular organizations or groups.
• Ditch coverage you don't need: Go over your policy and remove any extras you don't need, such as roadside assistance or car rental coverage. Check with your credit card company to see if they offer roadside assistance benefits.

Remember, the key to saving money is not just the discounts but the final price, so be sure to compare the overall price, including discounts, from multiple insurers.

How insurance companies determine rates

Applying for auto insurance does not directly affect your credit score. When insurance companies review your credit in the quoting process, it is considered a soft inquiry and shouldn't impact your actual credit score. However, it's important to note that your credit score can impact your auto insurance rates.

Now, let's delve into the factors that insurance companies consider when determining rates:

Vehicle-Related Factors

Insurance companies scrutinize various aspects of your vehicle to assess the likelihood of claims and their potential cost. These factors include:

• Make, model, and year: Older vehicles or those with a higher safety rating may result in lower premiums.
• Safety features: The presence of advanced safety features like collision avoidance technology, multiple airbags, and car alarms can lead to reduced rates.
• Repair costs: Vehicles that are cheaper to repair tend to have lower insurance rates.
• Theft risk: Cars that are less prone to theft or have lower theft rates in general may result in lower insurance premiums.
• Vehicle usage: If you use your vehicle for commercial purposes or drive a high number of kilometres per year, your rates may increase.

Personal Factors

In addition to vehicle-related considerations, insurance companies also evaluate personal factors, such as:

• Age, gender, and marital status: Younger drivers, especially males below the age of 25, often face higher insurance rates due to higher accident rates.
• Driving record: A clean driving record with no convictions or at-fault accidents can lead to lower premiums.
• Insurance history: A consistent insurance history with few claims can work in your favour when negotiating rates.
• Driving training: Undertaking driving training or defensive driving courses can demonstrate a commitment to safe driving and potentially lower your rates.
• Number of drivers: The number of drivers listed on your policy and their individual driving records can influence your premium.
• License status: The type of driver's license you hold and the length of time you've had it can impact your insurance rates.

Market Conditions

Market dynamics and economic factors also play a role in shaping auto insurance rates:

• Inflation: Insurers take inflation into account when setting rates, as it affects the cost of repairs, labour, and replacement vehicles.
• Changes in the marketplace: When demand is high and supply is low, prices tend to rise, impacting insurance rates.
• Theft and fraud: The increasing incidence of auto theft and fraud contribute to higher insurance costs for all drivers.
• Local factors: Insurance rates can vary across states or provinces due to differences in local traffic conditions, weather patterns, population density, and the cost of living.

Credit History

In most states or jurisdictions, insurance companies are permitted to use credit history as a factor in determining rates. A higher credit score can lead to lower insurance premiums, as individuals with good credit history are perceived as less likely to file claims. Factors that contribute to your credit-based insurance score include:

• Outstanding debt: The amount of debt you currently owe is a significant consideration.
• Credit history length: A longer credit history can positively influence your score.
• Credit mix: A diverse mix of credit accounts, such as credit cards, loans, and mortgages, can enhance your score.
• Payment history: Consistently paying your debts on time is crucial for maintaining a good credit-based insurance score.
• Pursuit of new credit: Applying for multiple new lines of credit simultaneously can negatively impact your score.

Frequently asked questions