Switching Auto Insurance: The Credit Conundrum

Changing your auto insurance provider will not damage your credit score. While insurance companies almost always check your credit when you buy a new policy, getting a quote will not affect your credit. This is because insurance companies do a soft pull on your credit, which does not influence your score. However, it is important to note that if you miss an auto insurance payment, your insurance company may send the unpaid premium to collections, which could hurt your credit score.

Getting a quote won't affect your credit score

Getting a quote for auto insurance will not affect your credit score. While auto insurance companies do check your credit score when you get a quote, they do so using a "soft pull" or "soft inquiry", which does not impact your credit score.

A "soft pull" is an involuntary inquiry used when creditors send potential customers pre-approved offers. It is also used when employers check job applicants' credit histories. Checking your own credit score is also considered a soft pull. Soft inquiries are recorded on your credit report so you can see who has inquired about your credit history, but they do not affect your score.

A "hard pull", on the other hand, is a voluntary credit check that occurs when you apply for credit, such as a mortgage, loan, or credit card. A hard pull will lower your credit score and indicates that you are actively shopping for credit. Too many hard pulls are bad for your credit score.

While getting a quote won't affect your credit score, your credit score can impact your car insurance rate. A higher credit score typically decreases your car insurance rate, with almost every insurance company and in most states. A higher credit score indicates that you are less likely to file a claim, and so the insurance company is taking on less risk by insuring you.

Insurance companies will also consider other factors when determining your auto insurance rate, such as your driving history, the type of vehicle you drive, your payment history, and the length of your credit history.

Your credit score impacts your insurance rate

Insurance companies use your credit history to help them decide whether to sell you insurance and at what cost. A higher credit score generally leads to a lower insurance rate. Conversely, poor credit can increase your insurance rate by as much as 88% compared to having good credit.

When reviewing your credit, insurance companies consider:

• The number of open accounts you have.
• How much you owe compared to your available credit.
• Any past due payments.
• How often you apply for new lines of credit.

Insurance companies are not allowed to use certain factors against you, such as medical debts that went to collection or credit checks from businesses that you didn't request. Additionally, if your credit score was negatively impacted by a major illness or injury, or the death of a spouse, child, or parent, the insurance company must consider this and you can request an exception.

While getting a quote for a new insurance policy will not affect your credit score, it is always a good idea to check your credit report regularly for any changes or errors. Credit reporting companies typically provide one free credit report each year.

Cancelling a policy won't affect your credit score

While there are several factors to consider when it comes to the impact of car insurance on your credit score, it's important to know that cancelling your car insurance policy is unlikely to directly affect your credit score. Here's what you need to understand about the relationship between car insurance and your credit:

Direct Impact on Credit Score

According to sources, cancelling your car insurance policy won't directly impact your credit score. Insurance companies generally do not report policy cancellations to credit bureaus, so you don't have to worry about a negative mark on your credit report simply because you cancelled your coverage. This means that switching insurance providers or policies won't have any direct effect on your creditworthiness.

Indirect Impact on Credit Score

While there is no direct impact, it's important to be mindful of potential indirect effects that could influence your credit score:

• Unpaid premiums: If you have outstanding premiums when you cancel your policy, your insurer might send the unpaid amount to a collection agency. This could then be reported to the credit bureaus, negatively impacting your credit score. It's crucial to pay your premiums on time to avoid such consequences.
• Coverage gaps: Cancelling your policy without having a new one in place can lead to a gap in coverage. If you get into an accident during this uninsured period, you might face financial difficulties that could indirectly affect your credit score. It's always advisable to have a new policy in place before cancelling your current one.
• Credit-based insurance scores: In certain states or regions, insurers use credit-based insurance scores to determine premiums. If you frequently change insurers or cancel multiple policies, it could be perceived as instability, potentially affecting future insurance rates. This perception of instability may be considered when determining your creditworthiness.

Best Practices for Cancelling Car Insurance

To avoid any potential impact on your credit score when cancelling your car insurance, consider the following:

• Pay premiums on time: Ensure that you pay your insurance premiums promptly to avoid any issues with collections and to maintain a positive credit score.
• Plan ahead: If you're thinking of cancelling, make sure you have a new policy in place to prevent coverage gaps and reduce financial risks.
• Shop wisely: When looking for new insurance, obtain quotes without affecting your credit score by requesting soft inquiries. Soft inquiries, or soft pulls, only check basic information and do not impact your credit score.

In summary, while cancelling your car insurance policy won't directly affect your credit score, it's important to be aware of the potential indirect consequences. By following the best practices outlined above, you can maintain a healthy financial standing and make informed decisions about your car insurance.

Missed payments can hurt your credit score

While changing your auto insurance won't affect your credit score, missed payments certainly can. Late or missed payments can negatively impact your credit score and your relationship with the company. This can reduce your chances of getting credit in the future.

Lenders use your credit score to assess your ability to manage your finances and predict whether you'll be able to make repayments. Late or missed payments suggest that you're struggling to manage your finances, and lenders may be less likely to approve your credit applications as a result.

Late or missed payments are recorded on your credit report for six years, and their impact on your score will reduce over time. Lenders usually pay more attention to your most recent credit history, so maintaining a good payment record after a missed payment will help to minimise the damage.

If you know you're going to miss a payment, it's best to contact your lender as soon as possible. They may be able to give you extra time, but late payments may incur fines and charges. Setting up regular payments via direct debit can help you to avoid missing payments in the future.

Some states limit the use of credit scores for insurance rates

While changing auto insurance does not affect your credit score, your credit score can impact your car insurance rate. A higher credit score generally decreases your car insurance rate, with almost every insurance company and in most states. However, some states have strict limitations on the use of credit scores when determining insurance rates.

California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah have strict limitations on the use of credit scores with auto or homeowners policies. In these states, credit scores are not allowed to be used for underwriting or rating auto policies, nor for setting rates for homeowners insurance. As a result, your credit score will not impact your ability to obtain or renew a policy, or how much you pay in premiums.

In Maryland, for example, homeowners insurance companies cannot refuse coverage, cancel a policy, refuse to renew a policy, or base insurance rates on an individual's credit history. Auto insurers can use credit history to determine rates on a new policy but cannot use it to deny an initial application, cancel a policy, refuse to renew a policy, or increase premiums during renewal.

Massachusetts law forbids auto insurance companies from using credit information or credit-based insurance scores when setting rates, underwriting a new policy, or renewing an auto policy. Homeowners' insurance rates also cannot be based on credit history.

In Michigan, insurance companies cannot use credit scores as part of their decision-making process to deny, cancel, or refuse to renew an auto or homeowners policy. Auto insurers also cannot use credit scores to determine rates. However, insurance companies might consider an individual's credit when deciding which instalment payment options to offer.

While changing auto insurance does not affect your credit score, it is essential to maintain a good credit score to benefit from lower insurance rates in most states.

Frequently asked questions