Jeffrey Wade
When it comes to insurance quotes, credit scores are an important factor. While getting a quote does require a credit check, it won't negatively impact your score. This is because insurance companies use a soft pull or soft inquiry to view your credit report information, rather than your actual score. This type of inquiry is also used when creditors send pre-approved offers or when employers check credit history. A hard pull or hard inquiry, on the other hand, occurs when a financial institution checks your credit history for lending decisions and can lower your credit score. While a higher credit score can lead to lower insurance premiums, other factors such as driving history, age, and location are also considered by insurers when determining rates.
| Characteristics | Values |
|---|---|
| Does getting an insurance quote affect credit score? | No |
| Type of credit check | Soft pull/soft inquiry |
| Hard inquiry/pull | Occurs when applying for credit, e.g. a loan or credit card |
| Soft inquiry/pull | Occurs when a company checks credit history as part of a background check |
| Credit-based insurance score | Used by insurers to determine the risk of insuring an individual |
| Credit score impact on insurance premium | A higher credit score can lead to lower premiums, while poor credit may result in higher rates |
| No-credit-check insurance | Some companies, like Root Insurance, offer no-credit-check insurance |
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What You'll Learn
Soft inquiries
When you request a car insurance quote, insurance companies will usually conduct a credit check to estimate the risk of insuring you. However, these checks are considered "soft inquiries" or "soft pulls", which means they do not affect your credit score. Soft inquiries are typically used when creditors send potential customers pre-approved offers, or when employers check a job applicant's credit history. They are also used when you check your own credit score. Soft inquiries are considered involuntary because you are not actively seeking credit.
In contrast, a "hard inquiry" or "hard pull" occurs when you apply for credit, such as a loan or credit card, and the lender checks your credit history to make a lending decision. Hard inquiries usually negatively impact your credit score. Soft inquiries are different because they are not related to a specific application for new credit. While soft inquiries will show up on your credit report, they are not used to calculate your credit score.
Insurance companies use soft inquiries during the quoting process because they are looking at your credit report information rather than your actual score. This allows them to gauge the risk of insuring you without impacting your credit. Since soft inquiries do not affect your credit score, you can get as many insurance quotes as you want from different companies to ensure you are getting the best rate.
While insurance quotes will not directly impact your credit score, it is important to note that your credit score can affect your insurance premium or rate. People with lower credit scores tend to pay higher premiums because they are considered higher-risk, with a higher likelihood of filing claims. Therefore, insurance companies may use your credit score to help determine your premium, but the soft inquiry itself will not change your credit score.
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Hard inquiries
When you request a car insurance quote, the company will usually perform a credit check on you. However, this will not negatively impact your credit score. This is because insurance companies use a type of credit check called a "soft pull" or "soft inquiry". Soft pulls are used by creditors to send preapproved offers to potential customers and by employers checking a job applicant's credit history. They are also used when you check your own credit score. Soft pulls are considered involuntary inquiries, and they do not negatively impact your credit score.
In contrast, a "hard pull" or "hard inquiry" can lower your credit score. A hard inquiry occurs when a financial institution, such as a lender or credit card issuer, checks your credit history when making a lending decision. Hard inquiries commonly take place when you apply for a mortgage, loan, or credit card, and you typically have to authorize them. A hard pull indicates that you are actively shopping for credit, and it will be visible to other lenders. Too many hard pulls are bad for your credit score.
Insurance companies use credit scores to evaluate risk. A higher credit score can lead to lower premiums, while poor credit may result in higher rates. Drivers with lower credit scores tend to file more claims, which makes them higher-risk.
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Credit-based insurance scores
While credit-based insurance scores are used in most states, some states have placed limitations or bans on their use. For example, California, Hawaii, Maryland, Michigan, and Massachusetts have restricted insurance companies from using credit scores to determine policy rates. Other states, like Oregon and Utah, have also established prohibitions on using credit history information in certain circumstances.
It is important to note that credit-based insurance scores are not the same as traditional credit scores. While credit scores predict an individual's ability to repay debt, credit-based insurance scores specifically focus on predicting the likelihood of filing an insurance claim and the potential cost of that claim. Additionally, credit-based insurance scores cannot use any personal information to determine an individual's score.
To improve one's credit-based insurance score, it is recommended to make timely payments, maintain low credit card balances, and manage debt effectively. Individuals can also obtain free credit reports annually from major consumer credit reporting companies to monitor their credit history and address any errors that may impact their score.
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How credit scores affect insurance rates
While insurance quotes do not affect credit scores, credit scores do impact insurance rates. When calculating insurance premiums, insurance companies in most states consider an applicant's credit score and credit history. This is done through a "soft pull" or "soft inquiry", which does not affect your credit score. However, a low credit score can lead to higher insurance premiums.
Insurance companies use credit-based insurance scores to assess the risk of insuring an individual. A credit-based insurance score is different from a credit score and is calculated using information from credit reports, including payment history, credit history length, and unpaid debt. This score represents the likelihood of an individual paying their bills on time. A higher credit-based insurance score indicates a lower risk of claims and results in lower premiums. Conversely, a lower credit-based insurance score can affect car insurance rates more significantly than a DUI conviction in certain cases.
In addition to credit-based insurance scores, insurance companies consider other factors, such as driving history, age, gender, location, and vehicle type, when determining insurance rates. These factors help insurance companies evaluate risk and set premiums accordingly.
It is important to note that not all insurance companies use credit scores in their pricing models. Some companies, like Root Insurance, have pledged to remove credit scores from their pricing models. Additionally, drivers in certain states, such as Texas, can obtain no-credit-check car insurance quotes. However, the majority of auto insurers still rely on credit-based insurance scores to determine rates.
To summarize, credit scores can influence insurance rates, with lower scores potentially resulting in higher premiums. Insurance companies use soft inquiries to assess credit-based insurance scores without impacting an individual's credit score. By comparing quotes from multiple insurance companies, individuals can shop around for the best rates, even with poor credit.
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Improving credit scores
Improving your credit score takes perseverance, but it can pay off. A good credit score can make it easier to get a loan, rent an apartment, or lower your insurance rate. Here are some ways to improve your credit score:
Understand the factors that influence your score
These include your payment history, amounts owed, length of credit history, credit mix, and new credit. Your debt payment history accounts for 35% of your FICO® Score and is the most important credit score factor. Payment history includes on-time, late, and missed payments.
Make on-time payments
Always make payments on time. If you're having trouble, set up autopay for at least the minimum amount due and create calendar reminders and alerts.
Pay down balances
Keep credit balances low. How much credit you have available is an important scoring factor, making up 30% of your FICO® Score. To maximize your score, keep balances as far below your credit limit as possible.
Avoid unnecessary debt
While your credit mix can help take a good credit score to the next level, it generally won't be a major factor in determining your eligibility for a loan or credit card. Your credit mix will likely improve naturally over time as you apply for different types of credit to meet your financial needs. Avoid taking on more debt than is necessary just for the sake of building credit.
Build your credit history
If you're building credit from scratch, consider asking a loved one to add you as an authorized user on their credit card, applying for a starter credit card, or opening a credit-builder account.
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Frequently asked questions
No, getting an insurance quote does not affect your credit score. Insurance companies will check your credit score when providing a quote, but this is what is known as a 'soft pull' or 'soft inquiry', which does not impact your credit score.
A hard pull or hard inquiry is when a financial institution checks your credit history when making a lending decision, for example, when you apply for a mortgage, loan or credit card. A soft pull or soft inquiry is when a company checks your credit history as part of a background check or for other reasons, such as providing an insurance quote.
Insurance companies use your credit score to determine how much of a risk you are to insure. A lower credit score indicates a higher risk, which will result in a higher premium.
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