Does Credit Score Affect Car Insurance?
Your credit affects various aspects of your life, including your car insurance. Although your credit score and auto insurance may appear unrelated, studies reveal that drivers with poor credit tend to pay significantly higher premiums compared to those with better credit.
Does credit affect car insurance rates?
In a strict sense, your credit score doesn’t directly affect car insurance rates. Instead, insurers use “insurance scores,” which incorporate credit information to assess the likelihood of a customer filing claims.
“When you apply for car insurance, the company checks your credit rating,” explains John Espenschied, owner of Insurance Brokers Group and an industry expert with over 20 years of experience. Customers in lower credit tiers are statistically expected to file more claims, resulting in lower insurance scores and, consequently, higher premiums.
While insurance scores based on credit significantly influence pricing, many individuals are unaware of this connection. Douglas Heller, Director of Insurance for the Consumer Federation of America (CFA), notes that most Americans do not realize that their credit history can impact their rates as much, if not more, than a drunk driving conviction. Drivers with poor credit often face much higher car insurance costs, even without a history of accidents or violations.
What are credit-based insurance scores?
Car insurance companies frequently use your insurance score to assess the level of risk you pose as a policyholder. Specifically, these scores help insurers gauge the likelihood that you will file a claim in the future, which can impact their costs.
How do insurance scores differ from credit scores? According to Douglas Heller, “Largely, they’re not.” Credit-based insurance scores reflect your credit history in a straightforward numerical format.
To calculate your credit-based insurance score, the insurer reviews your credit report, evaluating factors similar to those used in FICO scores—such as total debt, payment history, and the length of your credit history. While insurance companies do not disclose their scoring models, resulting in no universal tier system for insurance scores, a lower credit score typically leads to a less favorable insurance score.
Can you check your credit-based insurance score?
Unlike credit reports, insurance scores are not required to be provided to consumers. If you’re interested in knowing your insurance score, you can ask your insurance agent or provider for it, but there’s no guarantee you’ll receive a response. Additionally, because insurance scoring systems differ among companies, understanding the implications of your insurance score can be more complex than interpreting your credit score, which follows a standardized system.
Instead, it may be more beneficial to focus on your credit score, as it is more accessible and based on the same data used to calculate your insurance score. Improving your credit could help reduce your car insurance costs, making it a worthwhile goal if you’re looking to lower your insurance premiums.
Does an insurance quote hurt your credit score?
Requesting car insurance quotes does not affect your credit score. Insurance companies usually review your credit as part of the quoting process, but they use a soft credit check, which is different from a hard inquiry that can lower your score after applying for a loan or credit card. A soft check won’t appear on your credit report and has no negative impact on your credit.
Does car insurance build credit?
While credit influences car insurance rates in most states, paying for car insurance does not help build your credit. Insurance companies typically do not report premium payments to credit bureaus, meaning these payments won’t appear on your credit report or affect your credit score.
What you can do about your credit’s impact on your car insurance
The use of credit-based insurance scores can lead to varied car insurance pricing for different drivers. If you have a good to excellent credit rating, you’re likely to enjoy some of the lowest car insurance rates. Conversely, if you’re finding it hard to secure affordable coverage, your credit score might be a hidden factor contributing to higher rates.
Here’s what you can do:
- Don’t underestimate comparison shopping: “Everyone should be shopping around,” says Heller. This is especially crucial for drivers with fair or poor credit, as the disparity in available rates can be significant. “You might find much greater savings if you have low credit.”
- Consider working with an independent insurance agent: “Good agents can provide valuable insights and may be familiar with smaller companies or specific policies tailored to your needs,” advises Michael DeLong from the CFA.
- Wait before dropping coverage: “Always explore cost-saving options with your preferred coverage before reducing it,” Heller suggests. While some drivers might feel they need to cut coverage, it’s wise to first see if you can find a better deal for the coverage you wish to maintain.
- Work on building your credit: Although improving your credit may not provide immediate relief, it can lead to lower rates in the long run.
- Report discrimination: While using credit information in pricing is legal in most states, discrimination based on race or other protected factors is not. If you believe you’re being treated unfairly by an insurer, DeLong encourages you to contact your state’s insurance department or reach out to media outlets.