How Does Your Credit Score Affect Auto Insurance Rates?

How does credit score affect car insurance rates?

A driver’s credit score has a noticeable effect on car insurance prices. The vast majority of insurers use credit score as a factor, including every major company.

Your credit score, also called a FICO Score, is calculated based on five factors, all related to borrowing history and current situation.

Payment history: 35% Amount owed: 30% Length of credit history: 15% Credit mix (having multiple types of credit): 10% New credit: 10%

Credit scores range from 300 to 850. They are often divided into several tiers.

Tier FICO Score Excellent800-850Very good740-799Good670-739Fair580-669Poor300-579

However, it is not as simple as a certain score matching a certain premium. Rather, insurance companies take your full credit report and run it through an algorithm to calculate an “insurance score.”

An insurance score isn’t a measure of how creditworthy you are, but rather how risky you are from an auto insurance perspective, based on your creditworthiness.

How much your score affects your premium may vary between states. Five states — California, Hawaii, Massachusetts, Michigan and, temporarily, Washington — ban the use of any sort of credit report as a factor in determining insurance rates. Instead, these states opt to base rates on driving record, location and other characteristics.

How does Nationwide determine this credit-based auto insurance score?

For the credit portion of your insurance score, these are the key factors:

  • Payment history, including delinquencies or late payments
  • Length of credit history
  • Types of credit, such as credit cards and loans

When determining your car insurance credit score, sex, marital status, age, ethnicity, address and income are never considered.

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Does getting a car insurance quote affect your credit score?

Getting a car insurance quote should not affect your credit score. The credit check process involved in getting a quote is called a “soft pull.” In contrast, a “hard pull” credit check impacts your credit score.

Soft pull: Only verifies some basic information. Has no impact on your credit score.

Hard pull: Provides a full credit history and slightly lowers your credit score for a short time. If you apply to many lenders in a short period of time, a buildup of hard pulls can lower your score.

You will not receive a final price in almost every case until your credit has been checked.

How does Nationwide protect customer information?

Nationwide has many safeguards in place to ensure the confidential and responsible handling of your personal information.

  • The only employees who see your information are those who need it for legitimate business purposes – to provide products or services to you.

No Nationwide associate will ever view your actual credit report

What Is an Auto Insurance Score?

According to WalletHub, an auto insurance score is a rating insurance companies use to predict if someone is likely to file a claim. Insurers use information from credit reports to determine the risk.

Insurance companies consider a few factors when determining auto insurance scores. These include:

  • How recently you applied for other credit, such as an auto or home loan
  • Your history of on-time payments
  • How much of your credit card limits you use
  • The number of loans and open lines of credit you have and how old they are
  • Your debt
  • Foreclosures and bankruptcies

Once you apply for insurance coverage, you authorize the insurer to get your credit and other information they need to calculate your premium. In some cases, a company will ask for your authorization to view your credit information when putting together a quote so they can calculate a more accurate estimate. In both cases, the query is a soft pull and won’t affect your credit.

What states do not allow credit checks for insurance?

Depending on where you live, insurance companies are not allowed to use your credit score to determine your premium. There are currently five states in which state laws result in insurance companies that don’t use credit scores when determining car insurance rates:

  • California
  • Hawaii
  • Massachusetts
  • Michigan
  • Washington (temporarily)

In some other states, like Utah and Oregon, insurance companies cannot legally use your credit score as a basis for cancelling an auto insurance policy or refusing to renew an existing policy. However, insurance companies in these states can still use your credit score to determine your premium, which is why having a good credit score may give you an advantage in finding cheaper rates. Unless you live in one of the five states listed above, you can likely expect car insurance companies to look at your credit score when you apply for coverage.

Insurance score factors

The exact factors that influence your insurance score can vary from company to company. But all insurance companies are trying to determine risk, so the factors are likely similar. They may disregard some credit details that have no impact on insurance risk, or they may factor in some of the same credit information but at different degrees.

The credit-scoring company FICO offers a credit-based FICO insurance score used by some insurance companies. It’s made up of the following major credit categories:

  • Payment history (roughly 40%)
  • Total debt (roughly 30%)
  • Length of credit history (roughly 15%)
  • Pursuit of new credit (roughly 10%)
  • Mix of credit (roughly 5%)

Other insurance companies use their own credit-based insurance scoring formula. For instance, on its site Progressive gives examples of favorable and unfavorable credit factors that could affect your insurance score.

It’s important to note that there’s some information that isn’t included when calculating your credit-based insurance score. This can include info like the following:

  • Sex
  • Marital status
  • Age
  • Ethnicity
  • Address
  • Income

And while personal information like this might be considered part of the auto insurance pricing decision, it’s not factored into your insurance score.

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What Other Costs Factors Are Used to Determine Car Insurance Rates?

Insurers rely on a variety of factors that affect your car insurance rates, such as:

  • Your driving history
  • The type of car you drive
  • Where you live
  • Other drivers in your household
  • Your insurance claims history
  • Your coverage selections
  • Your deductible amount
  • Home ownership
  • Marital status
  • Gender
  • Occupation
  • Education

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.

How Does My Credit Score Play into the Final Cost of my Policy?

While the soft pull on your credit from insurance companies will not directly affect your credit score, the information your history provides could impact the final cost of your policy. Here are three ways that your credit can affect your insurance.

Your Credit History Contains Information That Insurers See as Risk Factors

Before an insurance company provides coverage to a new customer, they will consider the potential risks involved, based on that individual’s credit history. A car insurance company, for example, might consider your driving history, which can include violations and accidents, to determine how likely the person may be to file an insurance claim.

The same goes for your credit report. The information in your credit history helps the insurer create a credit-based insurance score. This number allows the insurer to get a better idea of your risk level and helps them make an accurate decision regarding your auto insurance coverage, and in some cases, your premium.

Credit-based insurance scores are prevalent throughout the insurance industry. It is estimated that around 95% of all car insurance companies base their underwriting process on the policyholder’s credit-based insurance score (in states where this practice is allowed).

Unlike your typical FICO credit score, a credit-based score isn’t available to the public. To get an idea of your risk factors, the insurance company looks over your credit report and history for the same factors lenders and creditors consider. For example, Progressive Insurance considers a potential customer’s current credit balances and their payment history in their underwriting process.

Suppose you have a low credit-based insurance score, and there are other factors on your credit report that could put you at a high risk of filing a claim. An insurance company may deny you a policy, or they may charge you a much higher premium.

Your Credit-Based Insurance Score Could Impact Your Eligibility to Take out a Policy

For most people, if you have a low credit score, it will not prevent you from purchasing a car insurance policy. However, a low score may stop you from getting the policy you want from a particular company. If your credit-based insurance score is extremely low, an insurance company could refuse to offer a policy. That means you will have to look elsewhere as you work on improving your credit score.

Your Credit Score Could Affect Your Policy Rate

The cost of your insurance premium could be affected by your credit score. The higher your credit score is, the lower your payments will almost always be. If your credit score is low and there are several negative items on your report, your insurance premiums will likely be more expensive than policyholders who have good credit.

Statistics from Consumer Reports show that drivers with “good” credit scores paid on average between $68 to $526 more each year for their insurance than those who had “excellent” credit scores. If you are in an accident or receive a traffic violation that causes your premium to go up, having bad credit could contribute to the price hike.

Remember that you have the right to obtain a free copy of your credit report. If your insurer has recently raised your premium due to poor credit history, it’s in your best interest to pull your credit report and look at your record for any mistakes or unfamiliar activity.

If you are currently searching for a better car insurance rate because your credit score has gotten worse or for any other reason, check out Compare.com for a fast and easy process. There, you can obtain quotes from over 60 of the top auto insurance companies to find a new policy that works best for your budget.

In fact, many of the companies Compare.com works with specialize in car insurance for drivers with below-average credit, meaning you could find some big savings by switching from one of the larger carriers.

Do Credit Scores Affect Car Insurance Premiums?

Most car insurance companies will pull your credit report and use your credit score and credit history as just one factor when setting premiums. Keeping your credit score high will benefit your finances in many ways, including keeping your insurance premiums low.

While your credit history can affect your premiums, it is not the only factor insurance companies consider when setting rates. They also look at:

  • Your driving history, which has an even more significant impact on premiums
  • Where you live
  • Your age
  • Gender
  • Marital status
  • The type of vehicle you drive

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