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Why Do Auto Insurance Companies Consider Your Credit?

Many auto insurance companies use credit-based insurance scores to help them decide whom to offer insurance to and how much to charge. These are different from credit scores used for lending purposes, and studies have shown they correlate with the likelihood of consumers filing insurance claims. When these scores are used, they are only one of many factors that can influence your insurance options and rates. Here's what you need to know.

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 credit-based insurance scores. Similar to general credit scores, credit-based insurance scores are largely based on your credit report from one of the major credit bureaus—Experian, 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.

However, insurance companies generally can't make a decision based solely on your credit—it's only one of many factors. Additionally, some states ban or strictly limit the use of credit-based insurance scores for use in auto insurance decisions.

What Additional Factors Do Auto Insurers Look at to Determine 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 than others.
  • 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 lead to lower insurance rates, such as a multi-policy discount if you also 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.

Insurance Inquiries Do Not Hurt Your Credit Score

When an insurance company checks your credit, a record of the credit check will be added to your credit file. You'll see this credit inquiry if you review a copy of your credit report, but because it's a soft inquiry, it won't impact your credit scores. In contrast, hard inquiries, the type that can come from applying for a new loan or credit card, can slightly hurt your credit scores temporarily.

Because applying for auto insurance doesn't impact your credit, you don't need to worry about rate shopping and submitting multiple insurance applications. 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.

How to Improve Your Credit Score Before Applying for Car Insurance

Because credit-based insurance scores are largely based on the same underlying information that as other types of credit scores, similar actions can help you improve all your credit scores. These include:

  • Pay bills on time and in full. Missing payments, having accounts sent to collections and filing for bankruptcy can all hurt your credit scores. On the flip side, making on-time payments can help your scores.
  • 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.

Over time, your credit scores may also improve as the length of your credit history increases. You may also benefit, a little, from having experience with both revolving and installment accounts in your credit history. Additionally, be mindful of applying for new credit as the resulting hard inquiries can temporarily hurt your scores.

Get Your FICO® Score for Free

While you can't check your credit-based insurance scores, Experian offers you free access to your FICO® Score based on your Experian credit report. You can monitor your score to see how your actions help or hurt your credit. And, if you notice a large increase in your score, you may want to see if you can now qualify for lower insurance rates.