Credit Score Impact: Auto Insurance And Bad Ratings

A bad credit score can have a significant impact on auto insurance rates. While a high credit score can help secure lower insurance premiums, a poor credit score typically leads to higher costs. This is because insurance companies often use a credit-based insurance score to assess the likelihood of future claims, with those deemed higher-risk paying more. The impact varies across states, and some states, like California, Hawaii, Massachusetts, and Michigan, prohibit or limit the use of credit scores in determining insurance rates. Improving one's credit score, therefore, becomes crucial in obtaining more favourable insurance rates.

Credit-based insurance scores

In most states, car insurance companies are allowed to use credit-based insurance scores when setting rates. However, California, Hawaii, Massachusetts, and Michigan have banned the use of credit scores in determining car insurance rates. In these states, car insurance companies base their rates on factors such as driving records, location, and other characteristics.

The use of credit-based insurance scores is controversial, as it can lead to higher rates for customers with poor credit. On average, drivers with poor credit pay significantly more for full coverage car insurance than those with good credit. Additionally, insurance companies that use credit-based insurance scores argue that there is a correlation between credit and the likelihood of filing a claim. On the other hand, some states have found that using credit-based insurance scores can result in lower car insurance rates for most drivers.

While improving your credit score can take time, it is worth considering if you want to lower your car insurance rates. Paying bills on time, maintaining old lines of credit, and keeping hard credit inquiries to a minimum can all contribute to improving your credit-based insurance score.

Poor credit increases insurance rates

In most states, a poor credit score can significantly increase your car insurance rates. While the specific impact of a poor credit score on insurance rates varies, several sources indicate that it can lead to an increase of around 70%-90% compared to those with good credit scores. This can translate to hundreds or even thousands of dollars in additional insurance costs annually.

Insurance companies use what is called a "credit-based insurance score" when determining insurance rates. This score is based on factors such as payment history, length of credit history, types of credit, and pursuit of new credit. A poor credit score is often seen as an indicator of higher risk, and insurance companies may charge higher rates to compensate for the perceived increased likelihood of claims being filed.

Improving your credit score can help lower your insurance rates. Here are some strategies to consider:

• Pay your bills on time: Timely bill payment is crucial for improving your credit score and reducing the number of late payments or credit delinquencies.
• Minimize hard credit inquiries: Hard inquiries, such as those from loan or credit card applications, can negatively impact your score. Soft inquiries, such as insurance quotes, do not affect your score.
• Monitor your score regularly: Regularly checking your credit score can help you identify errors or potential identity theft issues and take corrective actions.
• Maintain old lines of credit: Keeping long-standing credit accounts can positively impact your score, as credit history duration contributes significantly to your overall credit score.
• Manage your credit utilization ratio: Aim to keep your credit utilization below 30% by ensuring your spending remains within 30% of your total credit limit.

Improving your credit score

• Pay your bills on time: Payment history is the most important factor in determining your credit score. Set up autopay for at least the minimum amount due and create calendar reminders to ensure timely payments.
• Pay down revolving account balances: The amount you owe accounts for about 30% of your credit score. Aim to keep your credit utilization (the percentage of available credit you're using) as low as possible, ideally below 30%.
• Don't close your oldest account: The length of your credit history also impacts your score. Avoid closing old credit card accounts as it can hurt your credit score. Instead, consider using them occasionally or putting a small recurring bill on the card to keep it active.
• Diversify your credit: Having a mix of different types of credit, such as credit cards, loans, and mortgages, can improve your credit score.
• Limit new credit applications: Hard inquiries on your credit report can temporarily lower your score. Only apply for new credit when necessary and consider prequalification, which uses a soft credit check that doesn't impact your score.
• Dispute inaccurate information: Inaccurate information on your credit report can negatively impact your score. Review your credit reports from the three major credit bureaus and dispute any errors or signs of identity theft.
• Become an authorized user: If you're new to credit, consider asking a parent or loved one to add you as an authorized user on their credit card. Make sure the account has a positive payment history and a low credit utilization rate.
• Monitor your score regularly: Keeping an eye on your credit score can help you take proactive measures to improve it. Many banks and credit card companies offer free credit monitoring services.
• Be mindful of hard credit inquiries: When you apply for a line of credit, it results in a hard inquiry that can affect your score. Try to minimize these inquiries, especially if you're working on building your credit.

Credit-based insurance scores vs credit scores

Credit-based insurance scores and credit scores are similar in that they are both used to help companies understand risk and are based on information in a consumer's credit report. However, they are used by different types of companies and predict different outcomes.

Credit-Based Insurance Scores

Credit-based insurance scores are designed to predict the likelihood that an individual will file insurance claims that cost the insurance company more than it collects in premiums. These scores can affect insurance premiums, including auto, home, and life insurance rates. While credit-based insurance scores are calculated using information from credit reports, they also consider non-credit data, such as information from public records.

There are different types of credit-based insurance scores, and the weighting of factors may vary. Some of the factors that may be considered include payment history, accounts in collections, credit card balances and limits, the age of credit accounts, types of credit used, and recent credit applications.

Credit-based insurance scores typically range from 200 to 997, and insurers must consider factors beyond just the score when setting premiums. State laws generally prohibit insurance companies from declining applications or setting rates based solely on a credit-based insurance score. Additionally, some states do not allow insurance companies to use these scores at all.

Credit Scores

Credit scores, on the other hand, are used by lenders and creditors to assess creditworthiness and the likelihood of an individual falling behind on bill payments. FICO and VantageScore are widely used credit scoring models that lenders use in their application review processes.

Credit scores typically range from 300 to 850, and different factors can increase or decrease a score. These factors are generally grouped into five categories: payment history, credit utilization, length of credit history, types of credit used, and recent credit applications.

Lenders can use these general-purpose scores when reviewing applications for loans or credit cards. FICO also offers industry-specific credit scores for auto lenders and credit card issuers. Higher credit scores indicate greater creditworthiness.

Key Differences

While credit-based insurance scores and credit scores consider similar information, there are several key differences:

• Prediction: Credit-based insurance scores predict the likelihood of filing insurance claims that result in a loss for the insurer. In contrast, credit scores predict the likelihood of missing bill payments.
• Score Range: Most credit scores range from 300 to 850, while credit-based insurance scores can have different ranges, such as 200 to 997 for the LexisNexis Attract score.
• Usage Regulations: Insurers cannot rely solely on credit-based insurance scores for policy decisions, and some states restrict their use. In contrast, creditors can decline applications or take adverse actions based solely on a low credit score.
• Accessibility: Credit scores are easily accessible to consumers, while credit-based insurance scores may not always be available for individuals to view.

No credit check insurance

No-credit-check auto insurance is an option for those who want to bypass the potentially negative impact of a low credit score on their insurance rates. While most insurers use credit checks to create a credit-based insurance score that helps set your rate, some insurers provide auto insurance with no credit check. 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 most states, insurance companies can take your credit score into consideration when determining your premium. This is because individuals with lower credit scores are statistically more likely to file claims. As a result, insurers often view these drivers as higher-risk and charge them higher rates to lower their own financial risk.

However, there are a few companies that sell auto insurance with no credit check, such as CURE, Dillo, and Empower. Additionally, some states, including California, Hawaii, Massachusetts, and Michigan, prohibit or limit the use of credit scores in setting insurance rates. In these states, companies base rates on factors such as driving records, location, and other characteristics.

If you're looking for a car insurance policy based on your driving record rather than your credit report, you can consider usage-based insurance programs. These policies rely on in-vehicle technology to track your driving behaviour and determine your premium. Some companies that offer usage-based insurance include:

• Milewise® from Allstate
• SmartMiles® from Nationwide
• Root
• MetroMile

Another option is telematics-based insurance, which uses a telematics device or mobile app to track your driving habits and set your premium accordingly. Even with a poor credit score, you may be able to obtain more affordable rates by demonstrating safe driving skills. Some telematics-based insurance programs include:

• Progressive Snapshot
• State Farm Drive Safe and Save
• Nationwide SmartRide

It's important to note that the impact of not having established credit may vary among insurance companies. While some may increase rates due to a lack of credit history, others may not adjust their rates based on this factor. Therefore, it's advisable to compare rates from multiple companies to find the best option for your specific situation.

Frequently asked questions