Why is credit score used for insurance?
Some insurance companies believe there is a direct statistical relationship between financial stability and losses. They believe, as a group, consumers who show more financial responsibility have fewer and less costly losses and, therefore, should pay less for their insurance.
Why do auto insurers check credit? Your credit history factors into your credit-based insurance score, which insurance companies use to help predict the likelihood of a future accident or claim. Note that certain states have laws that don't allow the use of credit information as part of car insurance pricing.
California
Insurance companies in California don't use credit-based scores or your credit history for underwriting or rating auto policies, or setting rates for homeowners insurance. As a result, your credit won't impact your ability to get or renew a policy, or how much you pay in premiums.
Most major car insurance companies like GEICO, Progressive and State Farm factor in your credit score when giving you a quote. However, if you live in California, Hawaii, Massachusetts, or Michigan, you're in luck—these states don't allow credit history to affect your auto insurance rates.
In most states, insurance companies use your credit-based insurance score to set rates for auto and renters insurance as well as homeowners insurance. A good driver with poor credit will pay significantly more for car insurance than the same driver with a good credit score, according to a NerdWallet analysis.
Insurance companies must also comply with state insurance laws when using credit information in the underwriting and rating process. Why are some insurance companies using credit information? Some insurance companies believe there is a direct statistical relationship between financial stability and losses.
| Bad Credit Car Insurance Company | Average Monthly Cost for Poor Credit Drivers | Average Annual Cost For Poor Credit Drivers |
|---|---|---|
| Geico | $216 | $2,592 |
| Nationwide | $173 | $2,072 |
| Progressive | $331 | $3,977 |
| Erie Insurance | $227 | $3,319 |
Does credit score affect car insurance rates? Yes. A higher or lower credit score can have a big impact on your insurance rate. Poor credit increases full coverage rates by 86% compared to good credit.
| Score range | Rating |
|---|---|
| 776 – 977 | Good |
| 626 – 775 | Average |
| 501 – 625 | Below average |
| 200 – 500 | Poor |
According to the III, if you have a better credit-based insurance score, an excellent driving history, and zero claims on your record, you'll typically qualify for lower rates. This score is only one of many factors used to calculate your premium.
Do insurance companies run your credit for a quote?
When you request auto insurance quotes, some providers ask for your Social Security number. In states that allow it, providers use your Social Security number to review your credit report and determine your credit-based insurance score. It's one of the factors insurers in most states use to determine your premiums.
Credit information are used to calculate your insurance premium rates. An applicant with a low credit score will have to pay higher premiums to get health insurance coverage. The following points describe credit score impact on health insurance premiums. A good credit score can get you discounts on premiums.
Yes, Geico does use your credit score as a factor when determining your car insurance rates, as do most major insurers. However, credit checks by auto insurers do not harm your credit score and are only done in states where it is legal for your credit score to affect your rates.
Are insurers completely free to access and use your credit history? A few states prohibit insurers from using consumer credit information – California, Massachusetts and Hawaii for auto insurance and Maryland and Hawaii for homeowners insurance.
In most states, your credit history and credit-based insurance scores can impact whether you're offered a homeowners insurance policy and how much you'll pay in premiums. An insurance company might not be allowed to deny your application or renewal based solely on your credit.
Drivers with better credit tend to pay lower rates, so improving your credit could lower your premium. However, your premium will only be impacted if you live in a state that allows credit to be used as a rating factor and if you are with a company that uses credit-based insurance scores.
670 to 739: Good Credit Score
Lenders generally view those with credit scores of 670 and up as acceptable or lower-risk borrowers.
And when it comes to credit, 850 is the highest the FICO® Score☉ scale goes. For more and more U.S. consumers, practice is making perfect. According to recent Experian data, 1.54% of consumers have a "perfect" FICO® Score of 850.
A soft credit check is an inquiry into your credit report, initiated either by you or a company. A soft inquiry can occur even if you didn't apply for credit. It is primarily used to screen for preapproval offers or for a background check. Credit scores are not impacted by soft credit checks.
USAA, Nationwide, Travelers, Erie, Geico and Progressive are the cheapest car insurance companies nationwide, according to our analysis.
Can paying car insurance build credit?
With all of these factors, it's worth asking-does paying your car insurance build your credit history? The short answer is no. There is no direct affect between car insurance and your credit, paying your insurance bill late or not at all could lead to debt collection reports.
The minimum amount of car insurance you'll typically need is state-required liability coverage. This allows you to pay for some, if not all, injuries and damages you're liable for in an accident. The most commonly required liability limits are $25,000/$50,000/$25,000, which mean: $25,000 in bodily injury per person.
How does credit affect car insurance prices? Nationwide uses a credit-based insurance score when determining premiums. Studies show that using this score helps us better predict insurance losses. In fact, 92% of all insurers now consider credit when calculating auto insurance premiums.
Ultimately, charging drivers a higher rate for having bad credit is a way for the insurance company to lower its own financial risk. Because of this, in states where it is allowed, most car insurance companies consider your credit score when they provide a policy quote.
Improving your overall credit score can also have a positive effect on your insurance score.
