Car insurance rates are affected by many factors, including your location, age, credit score, and sometimes your credit score.
Insurance companies believe that drivers with lower credit scores are more likely to be sued for insurance claims. This is because of certain studies showing a correlation between how a person manages his finances and the likelihood they will file an insurance claim. Insurance companies match policy premiums to the potential risk posed by customers by taking credit scores into consideration when setting rates.
Insurance companies do not look at your credit score the same way lenders do to approve you for a loan or mortgage. They instead use an industry-specific score that is calculated using information from your credit reports.
Why does car insurance companies pull your credit report?
Car insurance companies will pull your credit score to determine if you are at risk.
In the early 1990s, insurance scores were introduced by the Fair Isaac Corporation, the creator of the FICO(r), credit-scoring model. FICO estimates that 95% percent of the companies offering personal lines of insurance use credit-based insurance scores when evaluating a customer’s risk.
Although some credit inquiries can affect your credit score, this inquiry does not. This is a soft credit inquiry. It’s similar to credit pulls, which are when companies check your credit to determine if you are eligible for financial products like loans or credit cards. Although it might be visible on your credit reports, it does not affect your score.
Auto insurance types that do not require credit checks
If you are able to, most auto insurance companies will verify your credit score during the underwriting process.
Some auto insurers will not require you to have a credit history. They base your premiums on other factors.
User-based car insurance
Insurance policies that are usage-based base their premiums on your driving habits and how many miles you drive, rather than setting a fixed rate.
These companies usually install a device that tracks your vehicle.
- How many miles have you driven?
- Wherever and when you travel
- How fast you can drive
- You can drive aggressively (rapidly acceleration, hard braking, cornering, etc.).
- Your airbag will be deployed if you are involved in an accident.
Insurance companies that offer usage-based policies may also require credit checks as part of their underwriting process. They then use telematics and other data to gather information about your driving habits, which could lead to a discount or offer safer driving.
Before you apply for these policies, ensure you are familiar with the information that insurance companies collect and how they may use it. This will help you to find the right program for you.
Remember that an insurer that does not check your credit won’t automatically mean that you will pay a lower rate than if you go with one that checks credit. You could be charged more if you drive long distances or drive frequently at night.
How do credit scores impact car insurance rates?
Although your credit score can impact how much you pay for auto insurance, it is not permitted by insurance companies to base rates and approvals solely on your credit.
These are just a few of the other factors they consider.
- Your driving record
- Your location
- Your marital status, age, gender and gender
- Type of vehicle that you drive
- You may be eligible for discounts such as bundling auto and home insurance, safe driving, or automatic payments
What states do not allow credit checks to determine auto insurance rates?
Five states currently ban or limit the use by insurance companies of credit scores to set policy rates. These states include California, Hawaii and Massachusetts, as well as Massachusetts, Massachusetts, Massachusetts, and Michigan. However, other states may soon adopt a similar approach.
A bill in Washington is currently being considered that would ban the use of credit scores for insurance pricing. Utah and Oregon have taken a different approach. They don’t allow insurance companies cancelling or refusing to renew coverage based upon the policyholders credit. However, it can be used to underwrite a new policy.
Insurance companies that do not check credit scores
Although not all insurance companies offer auto insurance policies that don’t require credit checks, here are some to look at if you’re looking for an insurance company that does.
Cure Auto Insurance
Cure stands for Citizens United Reciprocal Exchange and is a non-profit insurance carrier that rates customers based on their driving records. The company offers auto insurance in Michigan, New Jersey, and Pennsylvania.
Dillo Insurance offers auto insurance policies in Texas to customers with tickets or accidents, lapses of coverage, or no prior coverage.
Empower Insurance offers multiple car insurance options. Some of these don’t require credit to calculate premiums. Empower is only available in Texas.
Tips to improve your credit score
A company that does not require credit checks will not necessarily result in a lower auto insurance rate. If you work to improve your credit score, you might end up paying less. These are some tips.
- Review your credit report. Order free copies of your credit report from each of the three major credit bureaus at AnnualCreditReport.com and review them for errors. Common mistakes, such as incorrect reporting or multiple debts appearing at once, can lead to lower scores. You may notice a difference in your scores after following the instructions of each agency for disputing errors on credit reports.
- Make sure you pay your bills on-time. Credit scores are influenced by your payment history, which accounts for 35% of FICO’s scoring model. To avoid late payments if you have had problems paying your bills in the past, set up automatic payments or calendar alerts.
- Keep credit utilization low. You should pay down any debt that isn’t on one card or all of your revolving credit accounts, or ask your credit card company to increase your credit limit.
Don’t panic if you don’t have great credit and need car insurance. Insurance companies consider many factors when determining how much you will pay. Credit is just one example.
Compare rates and coverages with several companies. You might be able to get affordable car insurance even if you have poor credit.