Jeffrey Wade
Applying for insurance does not affect your credit score. When an insurance company checks your credit, it is a soft inquiry that does not change your score. However, insurance companies do use credit-based insurance scores when reviewing applications for new policies or renewals, and these scores can affect your eligibility and premiums. While a low credit score alone may not cause higher premiums, it can have that effect when combined with other factors.
| Characteristics | Values |
|---|---|
| Does applying for insurance affect credit score? | No, applying for insurance does not affect credit scores. Insurance companies use a "soft pull" or "soft inquiry" to check credit scores, which does not change or "ding" your credit score. |
| How does credit score affect insurance? | Credit scores can affect insurance eligibility and premiums. A higher credit score may lead to more options and lower insurance premiums, while a lower credit score may result in higher premiums or difficulty obtaining insurance. |
| How does insurance affect credit score? | Insurance companies do not report premium payments or non-payments to credit bureaus, so policy payments do not appear on credit reports. However, an unpaid premium sent to collections can be reported to credit bureaus, negatively impacting credit scores. |
| States that do not use credit scores for insurance | California, Hawaii, Maryland, Michigan, Massachusetts, Utah, and Oregon |
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What You'll Learn
Soft inquiries
A soft inquiry, also known as a soft pull or soft credit check, is a credit report check that does not affect an individual's credit score. It is primarily used to screen for pre-approval financing offers or for background checks. Soft inquiries are not connected to a specific application for new credit and are usually performed without the individual's permission. They are often carried out by potential employers or companies like credit card issuers or mortgage lenders to pre-approve individuals for offers.
In contrast, a hard inquiry or hard pull occurs when an individual officially applies for credit, such as a loan or credit card, and authorizes a lender to check their credit. Hard inquiries can temporarily lower an individual's credit score and are considered in credit score calculations because applying for additional credit may indicate a greater risk of not paying back existing debts.
When it comes to insurance, companies may perform soft pulls to check an individual's credit score and history when calculating premiums. Since insurance companies are not loaning money or providing credit, their credit checks are considered soft inquiries, which do not impact credit scores.
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Credit-based insurance scores
In most states, insurers can use credit-based insurance scores to determine premiums for property insurance, such as auto and homeowners' insurance. However, some states only allow it as one factor, while others do not allow it at all. For example, California, Hawaii, Maryland, Michigan, and Massachusetts ban or limit the use of credit scores in determining policy rates.
Consumers can obtain a free credit report annually from the three major consumer credit reporting companies (Equifax, Experian, and TransUnion) to check for errors and understand their credit-based insurance score. Improving one's credit score by paying down debt, making timely payments, and managing credit utilization can also help lower insurance premiums.
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Premiums and eligibility
An insurance premium is the amount of money an individual or business pays for an insurance policy. The premium is the amount you pay to keep the policy in force. Policyholders may choose from several options for paying their insurance premiums, including monthly, quarterly, or annually.
When it comes to auto insurance, insurance companies consider a variety of factors when determining premiums, including an individual's credit score and credit history. A higher credit score can help keep insurance premiums low. People with lower credit scores have a history of filing more claims, which makes them a higher risk and results in higher premiums.
However, it is important to note that insurance companies do not make a “hard pull” on your credit score when checking it to provide a quote, which means that applying for insurance does not negatively impact your credit score. This is in contrast to applying for multiple loans or credit cards, which can hurt your credit score.
In the context of health insurance, the premium is the amount billed monthly to policyholders for health coverage. Most people with Marketplace or employer-sponsored coverage receive subsidies that offset a significant portion of their premiums. The premium tax credit (PTC) is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. Eligibility for the PTC is based on meeting certain requirements, such as having a household income within a certain range and not filing a tax return using the status of "Married Filing Separately."
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Driving history
While credit scores are a factor in determining insurance premiums, they are not the only factor. Driving history and records are also considered by insurance companies when calculating premiums.
In most states, insurance companies are allowed to use an applicant's credit score and history when calculating their premium. This is because studies have shown that people with lower credit scores tend to file more claims, making them a higher risk. Thus, a higher credit score often correlates with a lower risk of claims, and drivers with higher credit scores usually enjoy lower premiums.
However, this is not the only factor that insurance companies consider. Driving records and history are also taken into account. A driver with a clean record can sometimes pay more in premiums than a driver with an accident or violation on their record due to the latter's credit history. Other factors that insurance companies consider include the driver's ZIP code, the age of the operators, the make, model, and age of the car, and the miles driven annually.
In some states, insurers are prohibited from using credit scores to determine premiums. These states include California, Hawaii, and Massachusetts for auto insurance, and Maryland and Hawaii for homeowners' insurance. In these states, insurers may only consider credit scores when initially setting rates or offering instalment payment plans.
Ultimately, while credit scores can impact insurance premiums, they are just one of many factors that insurance companies consider, and driving history also plays a significant role in determining premiums.
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Improving your credit score
Understand the factors that influence your score
Firstly, it's important to understand the factors that influence your credit score. These typically include your payment history, amounts owed, length of credit history, credit mix, and new credit. Payment history is a significant factor, so always try to make payments on time. Set up automatic payments or electronic reminders to help you stay on top of due dates.
Keep balances low and reduce debt
Your "credit utilization ratio" is a key factor in your credit score. Aim to use less than 30% of the credit available to you. Keep your balances low compared to your total credit limit. You don't need to carry a balance on credit cards; paying off the balance in full each month helps get you the best scores and keeps your interest costs down. Avoid unnecessary debt and only take on new credit when necessary.
Review your credit report and fix errors
Check your credit report carefully and report any errors. You can get one free report per year from the three major consumer reporting companies: Equifax, Experian, and Transunion. Reviewing your report will help you understand your credit profile and identify areas for improvement.
Build your credit history
If you're new to credit, consider applying for a starter credit card or a credit-builder loan to establish a credit history. You can also ask a loved one to add you as an authorized user on their credit card. Building a strong credit history takes time, so be patient and consistent in your efforts.
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Frequently asked questions
No, applying for insurance is a "soft pull", which does not change your credit score.
A soft pull is when an insurance company checks your credit score. Unlike a hard pull, which is when a credit card company checks your credit score, a soft pull does not impact your score.
Insurance companies use your credit-based insurance score to determine your premiums. A higher credit score generally leads to lower premiums.
A credit-based insurance score is calculated using five factors: payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. This score is different from your regular credit score.
You can improve your credit-based insurance score by making payments on time, paying down debt, and keeping credit card balances low.
