Haris Ashley
Having no credit history can affect your auto insurance application, as insurance companies may consider you to be a higher risk than those with good credit. In the US, some states ban or limit the use of credit scores in auto insurance decisions, but in others, insurance companies use credit-based insurance scores to help set your rate and predict the likelihood of a future accident or claim. While it won't necessarily mean higher rates, it is one of many factors that can influence the cost of your insurance.
| Characteristics | Values |
|---|---|
| Credit history impact on auto insurance | In states where it's allowed, insurance companies might consider a credit-based insurance score when reviewing applications or setting premiums. |
| Credit-based insurance scores | These scores are based on consumer credit reports and are used to predict the likelihood of filing insurance claims. |
| Lender credit scores | Insurance companies don't use the same scores as lenders and creditors, who use credit scores to evaluate creditworthiness. |
| Impact of credit history on insurance decisions | Insurance companies generally can't make decisions based solely on credit history or credit-based insurance scores. They also may not be able to deny applications or increase premiums due to lack of credit history. |
| State laws | Some states ban or limit the use of credit-based scores in auto insurance decisions, including California, Hawaii, Maryland, Michigan, Massachusetts, Utah, and Oregon. |
| Credit checks by insurance companies | Most auto insurance companies will check credit-based insurance scores if allowed by state law. |
| No credit check insurance | Some insurers provide auto insurance without a credit check, but this may not result in lower rates. |
| Factors affecting insurance rates | In addition to credit-based insurance scores, insurance companies consider driving records, location, age, gender, marital status, vehicle type, and discounts. |
| Credit score impact on insurance rates | Poor credit can increase insurance rates by up to 88% compared to good credit. |
| Payment history impact on credit scores | Late or missed payments can lower credit scores and affect insurance rates. |
What You'll Learn
Credit-based insurance scores
In the US, most insurers use credit-based insurance scores, but there are some states that ban or limit the use of credit information in car insurance pricing. These include California, Hawaii, Maryland, Michigan, Massachusetts, Utah, and Oregon. Even in states where credit information is allowed, insurance companies cannot use it as the sole basis for increasing rates or for denying, cancelling, or refusing to renew a policy.
The credit-based insurance score is calculated from information on your credit reports, including your payment history, the length of your credit history, and the mix of credit types. A higher credit score generally leads to lower insurance rates as it indicates lower risk from the insurer's perspective. Conversely, a poor credit score can significantly increase your insurance rates.
While credit-based insurance scores are a factor in determining insurance rates, it is important to note that insurance companies consider various other factors as well, such as your driving record, location, age, gender, and marital status, and the type of vehicle you drive.
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No credit history vs poor credit history
No credit history and poor credit history can both affect your auto insurance application, but in different ways.
No Credit History
If you have no credit history, it doesn't mean you can't get car insurance. However, insurance companies view drivers with no credit history as higher-risk. This means you will likely pay higher premiums than drivers with good credit or a longer credit history. This is because drivers with little or no credit tend to file more claims.
Poor Credit History
Insurance companies say that people with poor credit history are more likely to file a claim. As a result, you will pay more for car insurance, and possibly a lot more. Poor credit history can also affect the size of the down payment an insurance company requires and which payment options you are offered.
Improving Your Credit Score
Whether you have no credit history or poor credit history, there are ways to improve your credit-based insurance score:
- Make on-time payments
- Become an authorized user on another person's credit card
- Keep credit card balances low
- Make sure your credit report is accurate
- Pay down debts
- Don't open unnecessary credit accounts
- Establish and maintain credit
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Improving credit scores
- Make timely payments: Payment history accounts for 35% of your FICO score and is the most critical factor in determining your credit score. Setting up autopay for at least the minimum amount and creating calendar reminders can help ensure timely payments.
- Pay down credit card balances: The amount you owe makes up 30% of your FICO score. It is recommended to keep the credit utilisation rate, or the percentage of available credit used, below 30%.
- Don't close your oldest account: The length of your credit history accounts for 15% of your FICO score. Keeping old accounts open, even if you no longer use them, can help maintain a longer credit history.
- Diversify your credit: Credit mix accounts for 10% of your FICO score. Having a mix of credit cards and loans, such as auto or mortgage loans, can improve your credit mix and, in turn, your credit score.
- Limit new credit applications: Each new credit application results in a hard inquiry, which can knock a few points off your credit score. Only apply for new credit when necessary and consider prequalification, which uses a soft credit check that won't impact your score.
- Dispute inaccurate information: Inaccurate information on your credit report can negatively impact your score. Disputing and correcting errors can help improve your credit.
- Become an authorised user: If you're new to credit, you can ask a relative or friend with a good credit history to add you as an authorised user on their credit card. This can positively impact your score, especially if the account has a low credit utilisation rate.
- Get credit for rent and utility payments: Services like Experian Boost allow you to link bank accounts and get credit for on-time rent and utility payments, which can help improve your credit score.
- Monitor your credit: Regularly reviewing your credit report and score can help you identify areas for improvement and track the impact of your efforts over time.
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State-specific laws
California
Insurance companies in California do not use credit-based scores or credit history for underwriting or rating auto policies, nor for setting rates for homeowners insurance. As a result, your credit will not impact your ability to get or renew a policy, or the premiums you pay.
Hawaii
Hawaii bans auto insurers from using credit ratings when setting underwriting standards and rating plans, which determine your premiums. However, your credit can impact your homeowners insurance.
Maryland
Homeowners insurance companies in Maryland cannot refuse coverage, cancel a policy, refuse to renew a policy, or base insurance rates on your credit history (or lack thereof). Auto insurers can use your credit history to help determine your rate on a new policy, but they can't use it to deny your initial application, cancel a policy, refuse to renew a policy, or increase your premiums during a renewal.
Massachusetts
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 your credit.
Michigan
Insurance companies in Michigan cannot use your credit or a credit-based insurance score when deciding whether to deny, cancel, or refuse to renew an auto or homeowners policy. They also cannot use your credit score to determine your rates. However, they may consider your credit when deciding which instalment payment options to offer.
Nevada
Nevada has temporarily limited how insurance companies can use credit-based insurance scores during the pandemic. Until May 20, 2024, insurance companies in the state cannot consider negative credit information from events that happened after March 1, 2020, when deciding whether to deny, cancel, refuse to renew a policy, or increase premiums on an existing policy. They can, however, lower your premiums if you improve your credit. Unless the law becomes permanent, the limitation on credit-based insurance scores ends on May 20, 2024.
Oregon
In Oregon, insurance companies cannot cancel or refuse to renew an insurance policy because of your credit. However, they can consider your credit as a factor when deciding whether to initially offer you a policy, but they are limited to considering certain information from your credit report for underwriting and rating your policy.
Utah
Insurance companies in Utah can use your credit information when initially underwriting an auto policy, but it cannot be the only factor used to make the decision. After 60 days, the company cannot use your credit information to cancel or refuse to renew your policy, or decline coverage for a new vehicle that you or select household members own. They can only use credit information to offer a discount on your premiums, not to charge you more, and they cannot remove the discount based solely on a change in your credit.
It's important to note that even in states where credit information is allowed to be used, insurance companies generally cannot make decisions based solely on an individual's credit history or credit-based insurance scores. Other factors, such as driving record, location, demographics, vehicle type, and insurance type, also play a significant role in determining insurance rates and coverage.
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Credit checks and debt collection
Credit checks are a common part of the auto insurance application process. In states where it is allowed, insurance companies might consider a credit-based insurance score when reviewing your application or setting your premiums. This score is based on your credit history but is not the same as a traditional FICO Score that lenders use. While it considers many of the same factors, it is designed to predict the likelihood of a future accident or claim.
Your credit score can impact your car insurance rate, with higher scores generally leading to lower rates. Poor credit can increase rates by up to 88% compared to good credit. This is because insurance companies believe that drivers with poor credit tend to file more claims. However, it's important to note that not having a credit history may be viewed similarly to having poor credit by insurance companies.
If you have no credit history, some states, such as New Jersey and Rhode Island, prohibit insurance companies from charging you more for auto insurance. Additionally, some insurance companies provide auto insurance with no credit check, although this does not necessarily mean you will pay a lower rate.
While late or missed payments on your auto insurance premiums will not directly affect your credit score, they can lead to debt collection efforts by the insurance company. If you consistently fail to pay your premiums, your insurance provider may consider your account in default and engage a debt collection agency to pursue payment. This can further damage your credit and result in additional fees and legal consequences. Therefore, it is important to maintain timely payments to avoid any negative impact on your credit.
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Frequently asked questions
Yes, having no credit is often viewed the same as having poor credit by insurance companies, which can result in higher insurance rates. However, some states, including New Jersey and Rhode Island, don't allow companies to charge higher rates due to a lack of credit history.
Insurance companies use a credit-based insurance score to calculate premiums in states where it is allowed. This score is based on your credit history but is not the same as a traditional FICO Score. Insurance companies also consider other factors when setting premiums, such as previous claims, age, and driving history.
You can consider purchasing auto insurance from a company that doesn't check credit, such as Cure in Michigan, New Jersey, and Pennsylvania, or Dillo Insurance in Texas. Additionally, you can look for companies that offer discounts, such as multi-policy bundling or safe driver discounts.
