Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Here's what you need to know...

  • When you apply for auto insurance, some carriers will check your credit to help assign you the appropriate rates
  • Most companies use a special credit-based insurance score that’s calculated by a third-party like FICO or LexisNexis
  • It’s not until you apply for coverage that the company will pay to run your insurance score report
  • When your insurance score is requested, it is a soft inquiry on your credit
  • People will poor credit may be forced to pay high-risk insurance rates

Your ability to buy a home, finance a car, or even get a job is dependent on your credit score. It can be quite a shock to learn that having a poor credit history can have an effect on your auto insurance rates too.

Since statistics show that there is a direct correlation between creditworthiness and the number of claims a person will file, most state officials allow carriers to use credit to decide whether or not to insure a driver.

Your credit may have an impact on your application for coverage, but that doesn’t mean that your application for coverage will affect your credit file.

If you’ve been avoiding switching insurers because you’re worried about how a new application will affect your FICO score, here’s what you need to know about auto insurance and credit.

Start comparison shopping today by entering your zip code into our FREE tool above!

How does your credit affect your car insurance rate?

All but four states allow insurance carriers to check credit files when making auto insurance underwriting decisions. In states where credit is used to rate a policy, the insurer is only required to give the client a disclosure before checking the named insured’s credit file. If you agree to proceed with the quote, the company will proceed by ordering your report.

Credit can have a dramatic affect on your rates when you’re already considered a high-risk driver. After running your report and getting a score, the company will assign you to a risk class.

The applicant’s creditworthiness, driving history, claims history, vehicle type, and location are all factors that will be used to calculate your rate. The more likely you are to file a claim, the higher your rate.

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What does the carrier look at when they pull your credit file?

Not all carriers that are allowed to check your credit do, but the carriers that do won’t use your actual credit score like lenders do. In fact, the underwriter doesn’t even look through your credit file because of some potentially discriminatory information that can be found in the file.

Instead of reviewing your credit report from one of the three reporting bureaus, the company will order a credit-based insurance score through a third-party agency like FICO or LexisNexis.

Each of the two agencies has their own scoring systems. It costs the money for the insurer to check your score, but the expense isn’t passed on to you.

Calculating Your Insurance Score

A regular credit score used by lenders helps providers determine how likely you are to repay your debt. An insurance score is designed to show insurers how likely you are to avoid claims or pay for claims out of your own pocket.

Some information from your credit file won’t be used to calculate a score. Information that can’t be used includes:

  • Race
  • Religion
  • Gender
  • Age
  • Income
  • Occupation
  • Child support obligations
  • Interest rates
  • Inquiries on credit for employment

Every company creates their credit score with their own proprietary formula.

While different areas of your file weigh differently on your score through each scoring company, it’s pretty common for the same five areas of your report to reviewed.

These areas include:

  • Payment history
  • Pursuit of New Credit Accounts
  • Outstanding Debt
  • Length of your Credit History
  • Credit Mix

When the company runs your insurance score will it affect your credit?

Many people assume that whenever an inquiry is made their credit, their score will go down. While this is true when you’re applying for loans and credit cards, it’s not always true. Since the inquiry is a soft hit against your credit file, it won’t affect your credit rating to get insurance quotes or apply for coverage with another carrier.

You don’t have to stay with your current insurer until your term is up for renewal. If you feel like your rates are too high, the best thing to do is solicit rate quotes with other carriers.

Use our FREE comparison tool below and, after comparing quotes, you can decide if you’ll save money by moving your insurance or if it’s more convenient to wait.

References:

  1. http://www.aiadc.org/File%20Library/Member%20Center/Search%20Content/File%20Upload/Public%20Affai…
  2. http://www.naic.org/cipr_topics/topic_credit_based_insurance_score.htm
  3. https://personalreports.lexisnexis.com/lexisnexis_attract_auto_score/sample.jsp
  4. http://www.experian.com/blogs/ask-experian/insurance-inquires-do-not-affect-credit-scores/
  5. http://carinsurance.about.com/od/High-Risk-Insurance/tp/How-Long-Will-I-Be-A-High-Risk-Driver.htm
  6. http://www.consumerreports.org/cro/car-insurance/credit-scores-affect-auto-insurance-rates/index.htm
  7. http://uphelp.org/pubs/credit-scoring-insurance-unfair-practice
  8. http://www.iii.org/article/what-determines-price-my-auto-insurance-policy
  9. http://insurancescores.fico.com/
  10. https://personalreports.lexisnexis.com/lexisnexis_attract_score.jsp
  11. http://www.naic.org/documents/consumer_alert_credit_based_insurance_scores.htm
  12. https://www.credit.com/credit-reports/what-is-a-hard-inquiry/