Understanding Auto Insurance Credit Inquiries: A Guide To Checking Your Credit Impact

When applying for auto insurance, insurance companies in most states will use an applicant's credit score and credit history to calculate their premium. This is known as a credit-based insurance score. While it is not the only factor that insurance companies take into account, it is an important one. Checking your credit-based insurance score is not as straightforward as checking a regular credit score, but there are ways to find out more about where your credit-based insurance score stands.

Soft and hard credit checks

A soft credit check or soft credit inquiry is when someone runs a credit check for reasons unrelated to lending you money. These events are not associated with greater repayment risk, so they have no effect on your credit score. For example, a soft credit check can occur when:

• You check your own credit report or credit score.
• A utility company uses your credit report to decide whether to require a security deposit.
• An auto insurer uses your credit report to help set premiums.
• A current creditor reviews your account.
• A company checks your credit to see if you qualify for a promotional offer.
• An employer performs a background check.

A hard credit check or hard credit inquiry usually takes place when you apply for something, such as a loan, credit card, or line of credit. When a hard inquiry shows up on your credit report, there is a chance it could lower your credit score. A hard credit check can occur when:

• You apply for a loan, mortgage, auto loan, student loan, or personal loan.
• You apply for a credit card.
• You request a credit limit increase.
• You submit a rental application.
• You apply for a new utility service.
• A collection agency performs skip tracing.

Hard credit checks can remain on your credit report for up to two years, but they only affect your score for the first 12 months. Soft credit checks, on the other hand, do not affect your credit score at all.

How credit scores affect insurance rates

Credit scores can have a significant impact on insurance rates, with drivers with poor credit paying higher rates than those with good credit. In most states, insurance companies use credit-based insurance scores to help determine insurance rates and whether to take on a customer. These scores are different from the credit scores calculated by FICO® and VantageScore® and used by creditors. While a FICO score predicts the likelihood of a consumer being late on a payment, a credit-based insurance score predicts the likelihood of a consumer filing insurance claims that will cost the company more money than it collects in premiums.

A credit-based insurance score is calculated based on factors such as payment history, length of credit history, types of credit, and pursuit of new credit. A higher credit score is generally associated with a lower insurance rate. However, it's important to note that insurance companies use their own proprietary formulas to calculate credit-based insurance scores, and these formulas are not publicly available.

In some states, such as California, Hawaii, Washington, Massachusetts, and Michigan, the use of credit information to determine insurance rates is prohibited or strictly limited. In these states, insurance rates are based on factors such as driving record, location, and other characteristics.

It's worth noting that getting an insurance quote does not affect your credit score. Insurance companies typically perform a "soft pull" of your credit information, which does not impact your score.

How to improve your credit score

Improving your credit score takes time and patience, and there is no one-size-fits-all solution. However, there are several strategies you can use to boost your credit score:

• Pay your bills on time: Payment history is the most significant factor in calculating your credit score. Late or missed payments can significantly impact your score, so it's important to make at least the minimum payments on time.
• Keep your credit utilisation rate low: Lenders prefer a credit utilisation rate of 30% or below. This rate is calculated by dividing your current revolving credit usage by the total credit available to you. Keeping your credit utilisation rate low demonstrates to lenders that you are only using the credit you need.
• Maintain a long credit history: Avoid closing old accounts, even if you no longer use them, as this will shorten the overall length of your credit history.
• Diversify your credit mix: Lenders like to see a mix of credit card accounts and loans, such as mortgages, car loans, and student loans. Having a variety of account types, along with a solid payment history, demonstrates your understanding of credit fundamentals.
• Limit new credit applications: Applying for new credit accounts usually triggers a hard inquiry, which can negatively impact your credit score. Each hard inquiry can lower your score by a few points, and multiple inquiries in a short period can have a compounding negative effect.
• Dispute credit report errors: Mistakes on your credit report can pull down your score. You are entitled to free weekly credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion). Review these reports for any inaccuracies, such as late payments, someone else's credit activity, or outdated negative information. Dispute any errors to quickly improve your credit score.
• Use a secured credit card: Secured credit cards require an upfront deposit, which is usually the same as your credit limit. By making timely payments, you can build a positive credit history.
• Get credit for rent and utility payments: Rent-reporting services can add your on-time rent payments to your credit reports. Experian Boost also allows you to link bank accounts and select which payments you want to be considered in your credit report.
• Add to your credit mix: Consider opening a new credit account in good standing, especially if it is a type of credit you don't already have. For example, if you only have credit cards, think about taking out a loan, such as a credit-builder loan.

How to save on auto insurance with a poor credit score

A poor credit score can significantly increase your car insurance rates. In fact, drivers with poor credit pay 97% more, on average, for full-coverage car insurance premiums than drivers with exceptional credit. However, there are several ways to save on auto insurance if you have a poor credit score.

Firstly, shop around and compare rates from multiple insurance companies. This is because each company weighs factors differently, so you may be able to find a better price, even with poor credit. For instance, Geico is known for offering the cheapest rates for drivers with poor credit.

Secondly, consider improving your credit score. Paying your bills on time, keeping hard credit inquiries to a minimum, monitoring your score regularly, maintaining old lines of credit, and being aware of your credit utilization ratio can all help to boost your credit score over time.

Thirdly, look for insurance companies that offer a variety of discounts. For example, you may be eligible for a good driver discount, accident-free discount, multi-policy discount, paid-in-full discount, or paperless billing/electronic discount.

Finally, you could consider raising your deductible, which will lower your rates, or signing up for a usage-based insurance program, which can reward you for safe driving with discounts of up to 40%.

Remember, while a poor credit score can impact your car insurance rates, it is just one of many factors that insurance companies consider when calculating your premium. Other factors include your driving record, claim history, vehicle type, age, gender, and ZIP code.

States that don't allow credit checks for auto insurance

In the United States, auto insurance companies use a process called underwriting to help them decide how much to charge people for their insurance premiums. One of the factors that determine insurance rates is an individual's credit score. While this is a common practice in many states, some have banned using credit scores as a factor in setting insurance rates.

California

California has established regulations through Proposition 103 to bar discriminatory practices against policyholders based on their credit history. In this state, insurance companies don't use credit-based scores or credit history for underwriting or rating auto policies, or setting rates for homeowners insurance. As a result, your credit won't impact your ability to get or renew a policy, or how much you pay in premiums.

Hawaii

Hawaii bans auto insurers from using credit ratings when setting standards, including underwriting standards and rating plans, which determine your premiums. However, your credit can impact your homeowners insurance in this state.

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 can't be based on your credit in this state.

Michigan

Insurance companies in Michigan can't use your credit or a credit-based insurance score to deny, cancel, or refuse to renew an auto or homeowners policy. Additionally, auto insurers can't use your credit score to determine your rates. However, insurance companies might 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 until May 20, 2024. Through this date, insurance companies in the state can't consider negative credit information from events that happened after March 1, 2020, to deny, cancel, refuse to renew a policy, or increase premiums on an existing policy. However, they can still lower your premiums if your credit score improves.

Oregon

In Oregon, insurance companies can't cancel or refuse to renew an insurance policy because of your credit. However, they may consider your credit when deciding whether to initially offer you a policy. Even then, they are limited to considering certain information from your credit report to underwrite and rate your policy.

Utah

In Utah, insurance companies can use your credit information when initially underwriting an auto policy, but it can't be the only factor used to make the decision. After 60 days of being a customer, the company can't 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.

Auto insurance companies can also only use credit information to offer you a discount on your premiums, not to charge you more. Additionally, they can't remove the discount based solely on a change in your credit.

While most auto insurance companies will check your credit as part of the quoting process, there are a few companies that sell auto insurance with no credit check, such as CURE, Dillo, and Empower.

Frequently asked questions