Why Does Credit Matter For Car Insurance Quotes
While many consumers are unaware of this fact, car insurance companies have been utilizing credit reports and scores to help determine rates for over two decades. Auto insurance carriers claim that these pieces of information are a reliable indicator of the risk they are assuming by insuring a driver.
Various studies reveal that drivers with higher credit scores are less likely to file claims while drivers with lower credit scores are at a higher risk to have accidents and file claims.
Some car insurance carriers do not use credit scores to determine car insurance rates, although, most do.
Do All States Use Credit Scores To Calculate Insurance Premiums
A few states do not use credit scores to calculate premiums. California, Hawaii, and Massachusetts have laws preventing insurers from using credit history to set insurance rates.
Because most states do check credit, having bad or no credit can increase your rates. Depending on the state and insurer, some people can pay an average of 67 percent more in premiums for their car insurance than people with excellent credit. Below-average credit raises rates more in some states than in others.
If You Don’t Cancel Your Car Insurance Properly It Could Affect Your Credit Score
Cancelling your car insurance policy shouldn’t affect your credit score, whether you pay monthly or annually. As long as you cancel it properly.
If you pay monthly, you can’t just cancel your direct debit. You’ll need to tell your insurer you want to cancel and pay any admin fees.
If you don’t cancel your policy properly, you’ll get a bunch of missed payments on your credit record. And because pay-monthly car insurance is a credit agreement, it could be bad news for your credit score.
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Why Insurance Companies Do Credit Checks
Statistical data analyses, including a study by the Federal Trade Commission, show that credit-based insurance scores can accurately predict future insurance claims. Specifically, not only are policyholders with low credit scores more likely to file claims, but their claims tend to be more expensive. Because of this, companies use poor credit as a sign of risk, increasing rates.
Do Insurance Quotes Affect My Credit
No. Car insurance companies initiate a soft inquiry when checking your credit a type of inquiry that doesnt affect your credit score. Car insurers may choose to check your credit because industry studies, including one by the Federal Trade Commission,indicate that consumer credit scores can help predict the possibility of someone having an accident or filing an insurance claim in the future.
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How Does Your Credit Score Affect Your Insurance Rate
The types of credit scores that lenders and credit card issuers use to evaluate your creditworthiness won’t affect your insurance rates. These scores, including many FICO® Scores and VantageScore® credit scores, are created to help creditors predict the likelihood that a credit applicant will miss a payment. They might impact your ability to get a loan or the interest rate you’ll receive, but they’re not used for insurance purposes.
FICO, LexisNexis and other companies also create . Similar to general credit scores, credit-based insurance scores are largely based on your credit report from one of the major credit bureausExperian, TransUnion or Equifax. However, credit-based insurance scores are generally built to help insurance companies understand the likelihood that someone will file insurance claims that cost the company more than it collects in premiums.
Factors that influence your credit scores can also affect your credit-based insurance scores. These include whether you made past payments on time and your current debt balances. If you have poor credit, you may have a harder time getting approved for an auto insurance policy or may have to pay more in premiums.
Education: Twice As Many Drivers Now Say Include It
Drivers appear to be embracing the use of educational levels in car insurance quotes. When asked if education should be taken into account, 46% supported the idea, marking a 119% jump from last year, when only 21% supported it.
Over a quarter didnt agree that educational level should be considered, compared to 67% last year.
Insurers might include education level in car insurance quotes when theyve drawn a connection between an advanced degree and fewer insurance claims. And many auto insurance companies give education-related discounts, rewarding drivers who have achieved a bachelors or masters degree or Ph.D.
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But Does It Affect Your Score
But the question still remains. If car insurers pull your credit report during the application process, does that actually affect your credit? After all, . But the credit report a car insurer pulls wont actually affect your score, generally.
Why? Its because insurance companies do whats called a soft pull on your credit. There are two types of credit inquires, called a soft pull and a hard pull:
- A soft pull, also known as an involuntary inquiry, occurs when creditors want to send you pre-approved offers. That credit card solicitation you received in the mail was probably the result of a soft pull on your credit. Potential employers may check your credit as do your existing credit card accounts. Both of these are soft pulls. And if you check your own credit score, thats considered a soft pull, too. The key is that a soft pull happens when you arent actively seeking out credit. So it has no effect on your credit score.
- A hard pull, also known as a voluntary inquiry, occurs anytime you actively seek credit and fill out an application. The lender will run your credit report and determine whether to approve your credit application and under what terms. A hard pull on your credit report indicates that youre shopping for credit. So that will affect your credit score.
Heres what other major insurers disclosure about pulling credit reports:
State Farm says:
Is Auto Insurance Required
Forty-seven states require vehicles to have some level of insurance coverage before they can be on the road. Failure to have insurance can mean a fine and/or jail time in these states, not to mention suspension or revocation of your drivers license.
In most of these states, the minimum required coverage is liability insurance to cover damage and injuries you may cause, though a handful of states require additional coverage, such as collision and comprehensive.
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Your Credit History Contains Information That Insurers See As Risk Factors
Before an insurance company provides coverage to a new customer, they will consider the potential risks involved, based on that individuals credit history. A car insurance company, for example, might consider your driving history, which can include violations and accidents, to determine how likely the person may be to file an insurance claim.
The same goes for your credit report. The information in your credit history helps the insurer create a credit-based insurance score. This number allows the insurer to get a better idea of your risk level and helps them make an accurate decision regarding your auto insurance coverage, and in some cases, your premium.
Unlike your typical FICO credit score, a credit-based score isnt available to the public. To get an idea of your risk factors, the insurance company looks over your credit report and history for the same factors lenders and creditors consider. For example, Progressive Insurance considers a potential customers current credit balances and their payment history in their underwriting process.
Suppose you have a low credit-based insurance score, and there are other factors on your credit report that could put you at a high risk of filing a claim. An insurance company may deny you a policy, or they may charge you a much higher premium.
What Can I Do To Improve My Credit
Things like the length of your credit history can only change with time however, you can always strive to improve your overall credit-based insurance score and credit score by paying your bills on time and maintaining a low balance on your credit cards.
But remembera credit-based insurance score is only one of many factors used to determine insurance premiums. Other things like driving safely and responsibly are also important if you’re looking for ways to reduce insurance costs.
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The Truth About Your Credit Score And Insurance Quotes
It is true that insurance companies check your credit score when giving you a quote. However, what theyre doing is called a soft pull a type of inquiry that wont affect your credit score. Youll be able to see these inquiries on your personal credit reports, but thats it. These inquiries arent visible to lenders and have zero effect on your credit score.
What Is An Auto Insurance Score
According to WalletHub, an auto insurance score is a rating insurance companies use to predict if someone is likely to file a claim. Insurers use information from credit reports to determine the risk.
Insurance companies consider a few factors when determining auto insurance scores. These include:
- How recently you applied for other credit, such as an auto or home loan
- Your history of on-time payments
- How much of your credit card limits you use
- The number of loans and open lines of credit you have and how old they are
- Your debt
- Foreclosures and bankruptcies
Once you apply for insurance coverage, you authorize the insurer to get your credit and other information they need to calculate your premium. In some cases, a company will ask for your authorization to view your credit information when putting together a quote so they can calculate a more accurate estimate. In both cases, the query is a soft pull and won’t affect your credit.
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How Are Credit Scores Calculated
Different scoring models use specific algorithms to calculate your credit score, but in general, your credit score combines different factors about your financial history, including your payment history, meaning whether you make your credit card and loan payments on time, your credit utilization, which is the percentage of your available credit that youâre actively using, and the length of your credit history, meaning how long your accounts have been open.
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Is It Important To Have Good Credit When Shopping For Car Insurance
Having a good credit score while shopping for car insurance will ensure the rates youre offered are at their lowest. Companies like GEICO and State Farm state that they do review credit scores when quoting for future policies. If your credit shows past financial mistakes and derogatory remarks, your premium may be offered at a higher rate.
Hard Inquiry Vs Soft Inquiry:
are an important number, and it seems that just about anything that a person does will affect it. However, its important to note that there are hard inquiries and soft inquiries on a credit report.
A hard inquiry is when a person is seeking credit. In the case of auto insurance, the person isnt looking to gain credit. They are simply seeking to get the lowest possible rates on their car insurance.
Thankfully, the credit check for auto insurance is considered a soft inquiry. This makes the inquiry Non-voluntary which means that the person isnt seeking to gain credit, they are simply seeking to check for lower rates.
Soft inquiries on the credit report will not affect the credit score. So why then do auto insurance companies check credit scores?
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Average Cost Of Insurance By State And Credit Rating
Not all states use your credit score as a factor to determine car insurance rates, but most do. California, Hawaii, Massachusetts and Michigan have banned the practice of using credit scores to calculate car insurance rates. Recently, Washington also banned the use of credit as a rating factor, although the current ban is only effective for three years . Maryland, Oregon and Utah also limit the use of credit as an auto insurance rating factor. In these states, there are regulations limiting how and when insurance companies can use credit as a rating and underwriting factor.
Unless you live in these states, your credit score will likely have an impact on your auto insurance premiums. But because geographic location also plays a role, the state you live in and even your ZIP code will also impact your premium.
States have varying insurance premiums for a variety of reasons, Mak explains. The incidence of crashes in some states is higher than in others. Impacts are due to the mix of the ability of drivers in the state as well as road safety. Each states premiums are also affected by the court system and the cost of medical care in each state, with some states courts offering more generous awards and higher-cost medical care being drivers of higher premiums.
Depending on where you live, this is how your credit could impact your full coverage auto insurance premium:
*These states do not allow insurance companies to use credit as a rating factor.
Do Car Insurance Quotes Affect Credit Score
Each time you request an insurance quote, the company will ask you for personal information. Whether you use a comparison site or go direct to the insurer, you will need to provide certain details that allow it to calculate the premium. This is the same information that will be used by a bank or building society for credit checks and the insurance company will look at your credit file to confirm the information.
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Many people are concerned about shopping around for car insurance because they hear that the car insurance companies will check their credit report. They fear that it will affect their credit score when the reports are checked. Lets discuss this topic elaborately, so you understand whats going on inside.
Make All Your Payments On Time
Your payment history is the most heavily weighted credit score factor, accounting for 35% of your score. Your score could drop quite a bit if you miss even just one payment on a bill.
Plus, the higher your score, the harder it could be hit by a missed payment. So make all your payments in full and on time to continue building up a good credit score.
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When A Credit Check Is Registered
Although the request for a quote does not show as a credit check, the method you use to pay the premium may affect your credit score. If you pay the full premium in a single lump sum, it is not regarded as credit. However, if you want to pay the amount by instalments, it will be treated in the same way as taking credit. As a result, you will be taking out a credit agreement for the number of months over which the payments are spread. The insurance company will carry out a credit check before agreeing to accept payments in instalments. That effectively leaves a credit footprint and can influence any future applications for a loan. If you dont want a credit check to be carried out, ask to pay the premiums in a single amount.
For further details on this topic, or other issues relating to car insurance, dont hesitate to contact our expert team.
Keep An Eye On Your Regular Expenses
From subscription services to insurance, it can be easy to categorize monthly and periodic bills as fixed expenses. By shopping around, however, you can often find ways to decrease expenses, leading to regular and continued savings for months to come. Having good credit can also help you qualify for lower-cost financing, and make it easier to rent an apartment or find a new job.
In addition to providing free credit reports and score tracking, Experian offers the free Experian Boost tool, which lets you add utility, phone and certain streaming service payments to your credit history. If you have a history of paying these types of bills on time, you may be able to quickly boost your scores.
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