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Some auto insurance companies use credit-based insurance scores to help them decide whether to offer someone an insurance policy and the premiums for the policy. These scores are based on one of your consumer credit reports. However, they're not the same as the credit scores that lenders use. Here's what you need to know.
How Does Your Credit Score Affect Your Insurance Rates?
Your credit-based insurance scores might affect your options when shopping for auto insurance and the premiums you pay. However:
- Insurance companies don't use the same scores that lenders use. The types of credit scores that lenders and credit card issuers use to evaluate your creditworthiness won't affect your insurance rates.
- Your credit-based insurance score is only one factor. Insurance companies generally can't make a decision based solely on your credit history or credit-based insurance scores. They also might not be able to deny your application or increase your premiums if you don't have a credit history.
- Laws in your state may limit or ban the practice. Some states ban or strictly limit the use of credit-based scores in auto insurance decisions.
When an insurance company uses a credit-based insurance score, they're looking at a score designed to predict the statistical likelihood that you will file insurance claims that cost the company more than it collects in premiums. In contrast, the credit scores that lenders use (also called credit risk scores) predict the risk of someone missing a payment by at least 90 days.
Both types of scores are based on your consumer credit report from Experian, TransUnion or Equifax. As a result, the factors that influence your credit risk scores could also affect your credit-based insurance scores, such as whether you made past debt payments on time and your current debt balances.
Can You Check Your Credit-Based Insurance Score?
Checking your credit-based insurance score is unfortunately not as straightforward as checking the credit score lenders use. However, ways to learn more about where your credit-based insurance score stands include:
- Asking an insurance agent: You could try asking an insurance agent if they have access to your credit-based insurance score and whether they can share it.
- Getting an insurance quote: You should receive an adverse action notice if you get an insurance quote and the insurance company doesn't offer you a policy or charges you a higher premium because of your credit. The notice might include the credit-based insurance score that the company used, along with the main factors that affected your score.
Similar to how creditors can use different types of credit scores, insurance companies can choose from various credit-based insurance scores. For example, FICO, TransUnion and LexisNexis all create credit-based insurance scores, and insurance companies also might develop their own scores.
Even if it's interesting to see where you're at, know that the score you check might be different from the one that other insurance companies use. Also, unlike credit scores for lending purposes, auto insurance scores don't necessarily range from 300 to 850. And because the score ranges can vary from one type of score to another, there isn't a clear score that's bad or good.
Does an Insurance Quote Hurt Your Credit Score?
Getting insurance quotes doesn't hurt your credit-based insurance score or other credit scores. You may even want to get quotes for a new policy every six months to a year to ensure you've still got the best deal.
When an insurance company checks your credit, a record of the credit check—in this case, a soft inquiry—will be added to your credit file. You'll see this credit inquiry if you review a copy of your credit report, but soft inquiries won't impact your credit scores.
In contrast, hard inquiries, the type that can result when you apply for a new loan or credit card, might hurt your insurance and credit risk scores. However, a single hard inquiry tends to only have a small and temporary impact on scores.
What Additional Factors Affect Car Insurance Rates?
Even where it's allowed, your credit generally won't be the primary factor dictating whether you get offered a policy and how much you pay.
Auto insurance companies consider many criteria when setting rates, including:
- Your driving record: A clean driving record can help you get lower auto insurance rates.
- Where you live: It may be more or less expensive to insure a vehicle depending on where you live, as some areas have higher rates of vandalism, theft and accidents.
- Demographics: Your age, sex and marital status could also impact your rates in most places.
- The type of vehicle: Some vehicles are more expensive to insure than others, which is one thing you may want to consider when buying a vehicle.
- The types of insurance: Auto insurance can encompass different types of coverage, including liability, collision and comprehensive coverage. Your deductibles and insurance limits also impact your rates.
- Discounts: You may be eligible for a wide range of discounts that can lower your insurance rates, such as a multi-policy discount if you have homeowners or renters insurance with the same company.
- The company: Auto insurance providers may specialize in different types of coverage or drivers and weight factors differently. Getting quotes from several companies can help you find the best rate.
How to Improve Your Credit Score Before Applying for Car Insurance
Because credit-based insurance scores are largely based on the same underlying information as other types of credit scores, similar actions can help you improve all your credit scores. These include:
- Don't miss payments. Missing payments, having accounts sent to collections and filing for bankruptcy can hurt your credit-based insurance and credit risk scores.
- Make on-time payments. Making loan and credit card payments on time can help show insurance companies that you have a good history of managing financial obligations.
- Pay down debts. Having outstanding debts can hurt your credit scores, as can using a large portion of your available credit limit on your credit cards. Having low credit card balances and then paying your bill in full each month could help your score and save you money on interest.
- Use revolving and installment credit. Having open credit cards and installment loans, such as an auto loan, can also help your scores.
- Apply for new credit sparingly. Be mindful of applying for new credit because the resulting hard inquiries might temporarily hurt your scores.
Credit-based insurance scores also might consider the age of your oldest and newest accounts, along with the average age of all your credit accounts. A higher average age can help your scores, which is one reason your scores might increase over time.
Check Your Credit Report and Compare Insurance Quotes
Although you won't receive a credit-based insurance score, Experian allows you to check your credit report for free. You also get a FICO® Score☉ for free, along with score tracking and alerts when there are important changes in your credit report and score.
Experian members can also use the free auto insurance comparison feature to compare insurance quotes to their current coverage. If you find a better rate, you can easily change coverage online or over the phone—you might even get a refund from your current insurer. Even if you don't, Experian can continue monitoring rates and alert you when there's a better option.