Auto Insurance And Credit: What's The Connection?

Auto insurance companies do not report to credit bureaus. This is because insurance companies are not lending you money, and the contractual obligations to pay insurance premiums are not considered debts. However, failure to pay insurance bills can lead to negative entries on your credit report if the insurer turns them over to collection agencies. Some insurance companies may also check your credit score before quoting an auto insurance premium.

Auto insurance companies don't report to credit bureaus

While insurance companies don't report to credit bureaus, they may consider your credit score when you first open your policy. Insurers in many states, particularly auto insurers, may use a credit-based insurance score to help determine your premiums. This is because an insured person's credit health can help predict the likelihood of them filing a claim.

Although insurance companies don't report to credit bureaus, failure to pay insurance bills could lead to negative entries on your credit report if the insurer turns them over to collection agencies. A collection entry on your credit report will remain for seven years from the date of the missed payment and will likely lower your credit score for as long as it appears on your report.

If you're concerned about the impact of your insurance payments on your credit score, it's worth noting that getting a car insurance quote does not affect your credit score. Additionally, there are a few auto insurance companies that don't check credit scores when calculating premiums, such as Cure, Dillo Insurance, and Empower Insurance.

Non-payment of auto insurance can lead to debt collection

While insurance companies do not report to credit bureaus, non-payment of auto insurance can lead to debt collection activities, which can negatively impact your credit score.

When you purchase insurance coverage, you agree to make premium payments according to the schedule outlined in your policy. If you consistently fail to pay your premiums, your insurance provider may consider your account in default and take steps to recover the outstanding balance. This can include hiring a debt collection agency to pursue payment on their behalf.

Debt collection agencies use various tactics to collect money owed to companies by individuals. One common tactic is to list your unpaid account on your credit report, which can negatively impact your credit score for years, even after you've paid off the debt. A collection entry on your credit report will remain for seven years from the date of the missed payment that triggered it, and it will typically lower your credit score for as long as it appears on your report.

Before sending your account to a collection agency, your insurance company will likely send you multiple warnings and attempt to collect the debt for a period of one to six months. They may also offer a grace period, usually a few days, during which you can make a late payment without penalty. It's important to review your insurance policy or contact your provider directly to understand their specific policies and consequences for non-payment.

If you ignore notices from both your insurance company and the collection agency, your case may end up in court, which can lead to wage garnishment, a bank levy, or a lien on your property. Therefore, it's essential to take action and communicate any financial difficulties to your insurance company as soon as possible to avoid the severe consequences of non-payment.

Credit scores impact insurance premiums

Credit scores can have a significant impact on insurance premiums. In most states, insurers can use credit-based insurance scores to determine insurance premiums. This is because research has shown that individuals with better credit histories are less likely to file insurance claims, and carriers often reward these customers with preferential rates. Conversely, drivers with poor credit scores are more likely to file claims, making them higher-risk for insurers, who compensate by charging more.

Insurers use a credit-based insurance score, which is not the same as a regular credit score. A credit-based insurance score is calculated based on several factors, including payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. For example, FICO, a data analytics company, considers payment history (40%) and outstanding debt (30%) as the most important factors in determining a credit-based insurance score.

While the impact of credit scores on insurance premiums varies across states, the correlation is significant. On average, drivers with poor credit pay 115% more for full-coverage car insurance than those with excellent credit. In New York, for instance, drivers with poor credit pay an average of $7,625 per year for full-coverage car insurance.

It is worth noting that some states, such as California, Hawaii, Massachusetts, and Michigan, prohibit or limit the use of credit scores in determining insurance rates. Additionally, insurance companies cannot use certain factors against customers, including medical debts that went to collection and credit checks related to insurance coverage or from businesses that the customer did not request.

Some states prohibit insurance carriers from conducting credit checks

While insurance companies in most states can use credit-based insurance scores when making decisions about whom to insure and how much to charge, some states prohibit insurance carriers from conducting credit checks. As of January 2024, eight states have strict limitations on the use of credit with auto or homeowners policies: California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah.

In California, insurance companies cannot use credit scores or credit history information when underwriting or rating auto policies or setting rates for homeowners insurance. As a result, an individual's credit will not impact their ability to get or renew a policy or how much they pay in premiums.

Hawaii bans auto insurers from using credit ratings when setting standards, including underwriting standards and rating plans, which determine premiums. Credit history can, however, impact homeowners insurance in Hawaii.

Maryland has strict rules regarding credit scoring for home insurance. Home insurance companies cannot consider credit during any part of the policy process, including the application, renewal, rates, or premiums. Auto insurers in Maryland can use credit history to help determine rates on a new policy but cannot use it to deny an initial application, cancel a policy, refuse to renew a policy, or increase premiums during a renewal.

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 credit history in Massachusetts.

Insurance companies in Michigan cannot use credit or a credit-based insurance score when denying, canceling, or refusing to renew an auto or homeowners policy. Additionally, auto insurers cannot use credit scores to determine rates. However, insurance companies in Michigan might consider credit when deciding which installment payment options to offer.

Nevada temporarily limited how insurance companies could use credit-based insurance scores during the COVID-19 pandemic. Through May 20, 2024, insurance companies in Nevada cannot consider negative credit information from events that occurred after March 1, 2020, to deny, cancel, refuse to renew a policy, or increase premiums on an existing policy. This limitation will end on May 20, 2024, unless it becomes permanent.

In Oregon, insurance companies cannot cancel or refuse to renew an insurance policy because of an individual's credit. However, they can consider credit as a factor when deciding whether to initially offer a policy, but they are limited to considering specific information from the credit report for underwriting and rating the policy.

In Utah, insurance companies can use credit information when initially underwriting an auto policy, but it cannot be the only factor in their decision. After an individual has been a customer for 60 days, the company cannot use their credit information to cancel or refuse to renew their policy or decline coverage for a new vehicle owned by them or select household members. Auto insurance companies in Utah can only use credit information to offer discounts on premiums, not to charge higher rates. Once a discount is applied, it cannot be removed solely based on a change in credit.

Insurance companies may check credit scores before quoting an auto insurance premium

When you're looking for auto insurance, insurance companies may check your credit score when applying for coverage, although you can find a car insurance quote without a credit check. Car insurance companies will assess your score, which may impact the size of your premium.

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 costly for the insurer. Ultimately, the goal of underwriters is to minimise the risk to the insurer, which means that those seen as "high-risk" are often subject to higher premiums or sometimes denied coverage entirely.

Some companies place a greater emphasis on credit than others, meaning that quotes can vary widely from one insurer to another. For example, drivers with poor credit can expect to pay an average of $1,180 more per year for their auto insurance than drivers with good credit.

However, even if an insurance company performs a credit check for car insurance, they will also consider many other factors when setting premiums, including previous claims, age, and driving history.

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