The Role of Credit Scores in Auto Insurance Rates

The Role of Credit Scores in Auto Insurance Rates

Most people recognize that credit scores play a pivotal role in borrowing and loan approval decisions; however, less is understood about their impact on insurance premiums. When allowed by state law, insurance companies often utilize what’s called “credit-based insurance scores” to help determine policy prices.

Some states, including California, Hawaii, Massachusetts and Michigan, prohibit this practice while others limit it.

Credit Scores

Your credit score is used by lenders to assess whether or not you qualify for mortgage or car loans, as well as determine how much auto and homeowners’ insurance premiums you pay each month.

An insurer’s goal is to minimize their risks, so those with good credit tend to file fewer claims and enjoy lower premiums than those with poorer scores. On the contrary, those with poorer ratings tend to file more claims and incur higher insurance premiums.

California, Hawaii, Massachusetts and Michigan do not allow insurance companies to use credit-based scores when setting rates; however, your rate still can be affected by various factors including your history; for instance a large debt may appear on your report and cause it to drop significantly; to mitigate this possibility and improve your score further, be sure to make payments on time while working with collections agencies to settle outstanding accounts as soon as possible.

Credit Reports

Allstate and Geico, among many other major car insurers, rely heavily on credit scores and information from your credit report when setting car insurance rates. A credit score measures your financial worthiness; an insurance credit score takes into account your history with insurance such as how often you change providers, missed payments or whether or not revolving debt has reached its limit.

Your insurance credit score could be affected by inaccurate information or frequent checks (“hard inquiries”), both of which could decrease it. Therefore, it’s essential that you review your credit reports for errors as soon as possible and address them quickly in order to maintain good standing with insurers.

ValuePenguin conducted research to understand how credit impacts car insurance rates by comparing quotes in states which allow the use of credit-based insurance scores for new policies and renewals. Our hypothetical driver is 30 years old with a 2015 Honda Civic EX, driving 12,000 miles annually with minimum liability limits in all 50 states.

Credit-Based Insurance Scores

Credit-based insurance scores are used as part of the underwriting and rating processes, determining whether an insurer offers you coverage at what cost. At the same time, rating determines what amount is being charged for it.

Credit information can provide insight into future insurance claims, so nearly all auto insurers use it when setting rates. Understanding how your score and report impact car insurance rates is key in order to help lower them effectively.

Credit scores and insurance scores share similar information; however, their scoring models differ considerably. Insurance scoring models may disregard certain hard inquiries such as when applying for credit cards.

Studies have revealed that insurance scoring penalises low-income and minority communities due to negative factors being weighted more heavily than positive factors in its models. If this concerns you, reach out to elected officials and insurance commissioners directly for more information.

Insurance Rates

Most people understand the role credit scores play in key life milestones like home or car purchases. Lenders use your score to predict your creditworthiness and whether you will repay a mortgage or auto loan on time.

Insurance companies use your credit to set premium rates; specifically they employ a credit-based insurance score (CBIS).

Although CBIS doesn’t carry the same meaning as traditional credit scores used by lenders, it does predict your likelihood of filing car insurance claims. According to theory, drivers with poor credit file more claims than drivers with excellent credit which costs insurers money.

So California, Hawaii and Massachusetts prohibit insurers from considering credit as an underwriting factor when writing policies; yet most providers still rely on it at least partially; we analyzed car insurance quotes from top insurers in each state to see how credit impacts rates.

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