Paul Sanchez
Getting an insurance quote does not affect your credit score. While insurance companies do check your credit during the quote process, they use a type of inquiry called a soft pull or soft inquiry, which does not negatively impact your credit score. Soft pulls are typically used when creditors send potential customers preapproved offers and when employers check job applicants' credit history. They are also used when you check your own credit score. A hard pull, on the other hand, occurs when a lender checks your credit history before making a lending decision, and this can potentially lower your credit score. In the US, 95% of auto insurers use an insurance credit score to determine car insurance rates, and studies show that using this score helps predict insurance losses. However, a few states, including California, Hawaii, and Massachusetts, have laws preventing insurers from using credit history to set insurance rates.
| Characteristics | Values |
|---|---|
| Credit score impact on insurance premium | A low credit score can increase insurance premium |
| Credit score impact on insurance rate | A low credit score can increase insurance rate |
| Credit check by insurance companies | Yes, insurance companies do a credit check |
| Type of credit check | Soft pull/soft inquiry |
| Impact on credit score | No impact on credit score |
| States not using credit score to calculate premium | California, Hawaii, Massachusetts |
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What You'll Learn
Soft and hard inquiries
Soft inquiries, also known as "soft pulls" or "soft credit checks", occur when a person or company checks your credit as part of a background check. They are unrelated to a specific credit application and do not affect your credit score. Soft inquiries may be performed by employers, insurance companies, landlords, and utility companies to understand how responsible you are with your finances. They can also occur when a company is considering you for a promotional offer, such as a pre-approved credit card or loan offer. Soft inquiries can also appear on your credit report when you check your own credit, which is considered a healthy financial habit.
Hard inquiries, on the other hand, occur when a lender accesses your credit file with your permission as part of the credit application process. They are also referred to as "hard pulls" or "hard credit checks". Hard inquiries may impact your credit score and can remain on your credit report for up to two years, although their effect on your score typically lessens over time and they usually stop affecting your score after one year. Multiple hard inquiries in a short period may have a compounding negative effect, as lenders may interpret this as a sign of financial struggle. However, if you are rate-shopping for a mortgage, auto loan, or student loan, multiple inquiries within a short timeframe (typically 14 to 45 days) will be treated as a single inquiry, minimising the impact on your credit score.
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Credit-based insurance scores
The credit-based insurance score models used by insurers do not consider personal information. Instead, they focus on specific elements of a person's credit history. FICO, for example, considers five general areas to determine an individual's ability to manage risk:
- Payment history (40%): How well an individual has made payments on their outstanding debt in the past.
- Outstanding debt (30%): The amount of debt an individual currently has.
- Credit history length (15%): How long an individual has had a line of credit.
- Pursuit of new credit (10%): Whether an individual has recently applied for new lines of credit.
- Credit mix (5%): The types of credit an individual has, such as credit cards, mortgages, or auto loans.
It is important to note that credit-based insurance scores are not the same as traditional credit scores. While insurance companies may consider credit scores and history when setting premiums, they do not use the numerical FICO or VantageScore. Instead, they use credit report information to create a credit-based insurance score, which is likely weighted differently.
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Driving history vs credit score
While checking insurance rates does not hurt one's credit, a person's credit score can influence what they pay for auto insurance. A credit-based insurance score allows insurers to quote the fairest and most appropriate rate for every customer. Insurers consider information that pertains to potential losses. A low credit-based insurance score can affect car insurance rates more than a DUI in some cases. Studies show that using this score helps better predict insurance losses. 92% of all insurers now consider credit when calculating auto insurance premiums.
Drivers with poor credit pay twice as much for car insurance, even if their driving record is spotless. Those with bad credit scores pay an average of $1,500 more than those with perfect scores. In fact, drivers with Very Poor credit scores (under 523) pay an average of $6,254 a year for their car insurance. In contrast, drivers with Exceptional credit scores (823 and above) pay just $1,673 per year. That's an increase of $4,581 every year, or 273%, for having a bad credit score.
However, it is important to note that a person's driving record will still have a bigger effect on their premiums than their credit score. So, a terrible driver with a great credit score will still pay a lot for car insurance. Drivers can lower their insurance rates by driving responsibly and staying accident-free. They can also save money by improving their credit rating. For example, drivers who improve their credit rating just one tier save $355 or 17% per year on average.
Some companies are starting to forgo credit checks. Root Insurance has pledged to remove credit scores from its pricing model by 2025, while drivers in Texas can get a no-credit-check car insurance quote from Dillo. However, about 95% of auto insurers still use an insurance credit score to determine car insurance rates, according to FICO.
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State-based differences
The impact of credit scores on insurance rates varies across different states in the US. While most states allow insurance companies to use credit-based insurance scores to determine insurance rates, some states have prohibited or restricted this practice.
States with Prohibitions or Restrictions on Using Credit Scores for Insurance Rates:
- California: Insurance companies in California are banned from using credit-based scores or credit history for auto policies or setting rates for homeowners insurance.
- Hawaii: Auto insurers in Hawaii are prohibited from using credit ratings for underwriting or rating plans, which determine premiums. However, credit can impact homeowners insurance.
- Massachusetts: Auto insurance companies are forbidden from using credit information or credit-based insurance scores when setting rates, underwriting, or renewing auto policies. Homeowners insurance rates also cannot be based on credit.
- Michigan: Insurance companies cannot use credit or credit-based insurance scores to deny, cancel, or refuse to renew auto or homeowners policies. Auto insurers also cannot use credit scores to determine rates. However, credit may be considered for instalment payment options.
- Oregon: Insurance companies cannot cancel or refuse to renew a policy based on credit, but they may consider it when deciding to initially offer a policy.
- Maryland: Homeowners insurance companies cannot refuse coverage, cancel a policy, refuse to renew, or base rates on credit history. Auto insurers can use credit history to determine rates on new policies but not for denying applications, cancelling, refusing to renew, or increasing premiums during renewal.
- Utah: Auto insurance companies can use credit information for initial underwriting but not as the sole factor. After 60 days, credit information cannot be used to cancel, refuse to renew, or decline coverage for new vehicles. Credit information can only be used to offer discounts and not for increasing rates.
States Where Credit History May Not Impact Insurance Rates:
New Jersey and Rhode Island do not allow companies to charge more for a lack of credit history.
States Where Poor Credit Significantly Increases Insurance Rates:
- Washington, D.C.: Poor credit drivers pay more than twice as much.
- Connecticut, Georgia, Indiana, Kentucky, Maine, Minnesota, Mississippi, Missouri, New Jersey, New York, South Carolina, and Texas: Poor credit more than doubles insurance rates.
- Washington: Among states that consider credit, Washington has the smallest increase in rates for poor credit, at 30%.
The impact of credit on insurance rates is influenced by various factors, including state regulations, insurance company policies, and individual circumstances. While checking insurance rates may not directly hurt credit scores, improving credit can help lower insurance rates in states that consider credit standing.
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Shopping around for quotes
Shopping around for insurance quotes can help you find lower rates, even if you have poor credit. However, there are a few things to keep in mind when doing this. Firstly, while getting an insurance quote will not directly lower your credit score, it can result in a soft pull or soft inquiry on your credit, which is when creditors send potential customers pre-approved offers. Soft pulls do not impact your credit score, but multiple soft pulls can add up and eventually start to negatively impact your credit score by indicating financial instability or over-reliance on credit. Therefore, it is recommended to space out insurance shopping over a few days or weeks to minimize the impact on your credit.
Additionally, insurance companies in most states do use an applicant's credit score and credit history as one factor when calculating their premium. They are not looking at your real credit score but are instead using your credit report information to create what is called a credit-based insurance score. This score helps them determine how much of a risk you are to insure. So, while shopping around for quotes can help you find lower rates, it is important to be mindful of how often you are doing this and to prioritize getting quotes from insurers that do not use credit scores to calculate premiums. For example, California, Hawaii, and Massachusetts have laws preventing insurers from using credit history to set insurance rates.
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Frequently asked questions
No, getting a car insurance quote does require a credit check, but it won't hurt your credit score. It is considered a "soft pull" or "soft inquiry", which does not affect your credit score.
A soft pull is a type of credit check that occurs when a person or company checks your credit history as part of a background check. Soft pulls do not affect your credit score.
A hard pull, also known as a "voluntary inquiry", occurs when a lender runs your credit report to determine whether to approve your credit application and under what terms. A hard pull will affect your credit score.
A low credit-based insurance score can affect your insurance rates more than a DUI in some cases. A history of late payments and a high amount of debt correlate with more auto insurance claims. However, your driving record will still have a bigger effect on your insurance premiums than your credit score.
