Personal Finance

Why Do Car Insurance Companies Base Their Rates on Credit Scores?

Under the Fair Credit Reporting Act, car insurance companies may use credit reports as part of their underwriting process. Specialized insurance credit scores are used to analyze information from the credit report.

How does your credit score affect your insurance rate?

Credit scores can help provide insurance companies a basis to determine your financial ability to make premium payments on time. They also help determine the likelihood that you'll make an insurance claim.

While your credit score doesn't determine the probability that you'll get in a car accident, studies have found there is a correlation between an individual's credit score and the overall cost to insure that person.

Checking a potential customer's credit score simply helps insurance companies set different premium rates based on risk especially when it's a customer's first time applying for insurance with that company.

Auto Insurance Companies May Have Different Criteria

Insurance companies don't use the same type of credit score that a mortgage company or car dealer would. Instead, they use specialized versions of credit scores that have been found to be effective predictors of risk for automotive policies. Being able to assess risk in this way enables insurance companies to offer lower insurance rates to those customers who have good scores.

Insurance Inquiries Do Not Hurt Your Score

Any time someone requests your credit report, an inquiry will be added to your credit history. There are two sections of inquiries in your credit report: requests viewed by creditors and others, and requests viewed only by you. While inquiries seen by lenders can have a marginal impact on your credit scores, insurance inquiries are listed under the section that only you see. This means that applying for new car insurance will not impact your credit scores at all.

Check out the scope to hear answers to all the questions asked.

Do You Have Questions About Credit?

Join our live video chat every Tuesday and Thursday at 2:30 p.m. ET on Periscope. Rod Griffin, Director of Consumer Education and Awareness at Experian, is available to answer your questions live.
Scoped on: 11/29/2018