Auto Insurance Without Credit Checks: What's The Catch?

Auto insurance companies use credit scores to set rates and approve or renew auto policies. While this is the case for most insurers, some auto insurance companies do not run credit checks. This is appealing to those with a poor credit history, but it doesn't necessarily mean that you will pay a lower rate. In some states, it is illegal for insurers to use credit scores when setting rates.

Some auto insurance companies don't check credit scores

While most auto insurance companies use credit scores to set rates and approve or renew auto policies, some insurers do provide auto insurance with no credit check. This is particularly appealing if you have a poor credit history. However, purchasing car insurance from a company that doesn't check credit doesn't necessarily mean you'll pay a lower rate than you would with a company that does.

In some US states, credit checks for auto insurance are not allowed. These include California, Hawaii, Massachusetts, and Michigan. In other states, such as Maryland, Utah, and Oregon, insurance companies cannot use credit scores as a basis for cancelling or refusing to renew coverage, but they can still use them to determine premiums.

There are a few companies that sell auto insurance with no credit check, including:

• CURE (Citizens United Reciprocal Exchange), which bases rates on customers' driving records and currently offers insurance in Michigan, New Jersey, and Pennsylvania.
• Dillo Insurance, which provides auto insurance in Texas to customers with tickets, accidents, lapses in coverage, or no prior coverage, without checking credit.
• Empower Insurance, which offers car insurance options without using credit when calculating premiums; also only available in Texas.
• Root Insurance, which has vowed to phase out the use of credit when setting rates.
• Metromile, which tracks mileage to set rates.
• Milewise from Allstate, a usage-based insurance option.
• SmartMiles from Nationwide, another usage-based insurance option.

Credit scores are used to set insurance rates and approve policies

Credit scores are used by auto insurance companies to set insurance rates and approve policies. This is because drivers with lower credit scores are considered higher-risk clients, as studies indicate a connection between how a person manages their finances and how likely they are to file an insurance claim.

In most states, insurance companies can use credit-based insurance scores when making decisions about whom to insure and how much to charge. These scores are based on a customer's credit report and are designed to predict how likely they are to file a claim that will lead to a loss for the insurer.

While each insurer has its own proprietary underwriting system for calculating an insurance-based credit score, common factors that usually factor into this score include:

• Outstanding debt
• Credit history length
• Credit mix
• Payment history
• Pursuit of new credit

Although using credit-based insurance scores to calculate rates is legal on the federal level, insurance companies typically aren't allowed to use credit history as the sole reason for increasing rates or denying or canceling a policy.

In the United States, California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah have strict laws that limit the use of credit scores in setting insurance rates.

Credit scores are used to predict the likelihood of accidents and claims

Credit scores are used by auto insurance companies to predict the likelihood of accidents and claims. Historical data from the Federal Trade Commission shows that drivers with poor credit file more claims than those with excellent credit, and these claims are more expensive for insurers. Insurers use credit scores to minimise the risk to themselves, which means that those seen as "high-risk" are often subject to higher premiums.

Insurers cherry-pick around 30 elements from a credit report to create a proprietary score that's very different from a standard credit score. This means that one score cannot be used to guess the other reliably. However, some insurers purchase credit-based insurance scores from companies like FICO, which weighs the following factors to determine its auto insurance scores:

• Payment history (around 40%)
• Outstanding debt (around 30%)
• Length of credit history (around 15%)
• Pursuit of new credit (around 10%)
• Mix of credit experience (around 5%)

While credit scores are used to predict the likelihood of accidents and claims, it's important to note that other factors also come into play when determining insurance rates. These can include age, gender, marital status, vehicle type, and driving record. Additionally, certain states have banned the use of credit scores in calculating insurance rates, including California, Hawaii, Maryland, Massachusetts, and Michigan.

Some states ban the use of credit scores for setting insurance rates

While most auto insurance companies use credit scores to set rates and approve or renew auto policies, some states have banned or limited the use of credit scores for setting insurance rates. These states include California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah.

In California, Hawaii, and Massachusetts, the use of credit scores in pricing is outlawed. In these states, legislators believe that evaluating credit scores may disadvantage low-income drivers. As a result, your credit score will not impact your ability to get or renew a policy, or the amount you pay in premiums.

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

Maryland has similar restrictions, where homeowners insurance companies cannot refuse coverage, cancel a policy, refuse to renew a policy, or base insurance rates on your credit history. Auto insurers can use your credit history to determine your rate on a new policy, but they cannot use it to deny your initial application, cancel a policy, refuse to renew a policy, or increase your premiums during a renewal.

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

In Michigan, insurance companies cannot use credit or a credit-based insurance score to deny, cancel, or refuse to renew an auto or homeowners policy. Additionally, auto insurers cannot use credit scores to determine rates. However, insurance companies may consider credit when deciding which installment payment options to offer.

Nevada temporarily limited the use of credit-based insurance scores during the pandemic. Through May 20, 2024, insurance companies in Nevada cannot consider negative credit information from events after March 1, 2020, to deny, cancel, refuse to renew a policy, or increase premiums. They can, however, lower premiums if you improved your credit.

Oregon and Utah have also placed restrictions on the use of credit scores. In Oregon, insurance companies cannot cancel or refuse to renew a policy because of your credit, but they can consider your credit when deciding whether to offer a policy initially. In Utah, insurance companies can use credit information when initially underwriting an auto policy, but it cannot be the only factor. After 60 days, the company cannot use your credit information to cancel or refuse to renew a policy or decline coverage for a new vehicle.

While most auto insurance companies use credit scores, these state laws provide exceptions and limitations on this practice. It is important to note that the specific regulations may vary from state to state, and it is always a good idea to review the laws and regulations in your state regarding the use of credit scores in auto insurance.

Usage-based insurance bases premiums on driving behaviour, not credit scores

Usage-based insurance, also known as telematics, bases premiums on driving behaviour, not credit scores. This type of insurance is offered by some auto insurance companies and can result in cheaper car insurance if you are a good driver.

Usage-based insurance programs generally measure speeding, acceleration, harsh braking, mileage, and the time of day you drive. The technology used to track your driving data depends on your car insurance company. Some common methods include:

• Systems built into your car, such as BMW ConnectedDrive or OnStar
• A device plugged into your car's on-board diagnostics (OBD-II) port, such as Nationwide SmartRide
• A smartphone app, such as Allstate Drivewise or Farmers Signal
• A "tag" device installed on your windshield or rear window that pairs with your smartphone via Bluetooth, such as Liberty Mutual Insurance RightTrack

Your driving behaviour is typically measured for a period of months using one of these methods. After the program concludes, your insurance company will take the data into account when calculating your premium. It's important to note that your premium could be discounted or increased based on the results.

There are two main types of usage-based programs: driving-based and mileage-based. Driving-based programs measure factors such as hard braking, rapid acceleration, and the time of day you drive. Mileage-based programs only measure how many miles you drive.

Usage-based insurance has become popular as it leverages technology to help auto insurers more accurately measure your risk of an accident. Some benefits of usage-based insurance include:

• Discounted premiums: Participating in a usage-based program can lead to immediate and long-term savings if you are a safe driver.
• Safer driving: Drivers tend to operate their vehicles more cautiously when they know they are being monitored, leading to fewer accidents and violations.
• Improved driving habits: These programs can provide analysis to help you identify areas where you can become a better driver, such as gentle braking or taking turns more slowly.
• Easier accident investigation: Knowing the speed and direction of vehicles involved in an accident can aid in the investigation process.

However, it's important to note that not all drivers will get cheaper rates with usage-based programs. If you frequently engage in aggressive driving behaviours, your insurer may raise the cost of your policy. Additionally, the device or app may not always be able to differentiate between defensive driving and unsafe driving.

Frequently asked questions