Why do car insurance companies check credit?

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Things to Remember...
  • While credit history and scores are most commonly used to obtain additional lines of credit and sometimes employment, they are also used by the majority of auto insurance companies to help determine the rate that you pay for car insurance
  • However, in some states, it is illegal to use credit to determine an insurance premium
  • Mediocre or poor credit scores and history can have a negative effect on the auto insurance premium you pay
  • Working to improve your credit score will help you to pay reduced auto insurance premiums. You can also use an online auto insurance comparison tool to find the best rates for your situation
  • There are several other factors used in determining your car insurance premiums other than credit scores and history, such as your driving record and history

While most consumers expect to have their credit checked when applying for a car loan, a mortgage, or even as a pre-employment screening, many are unaware that their credit can affect what they pay for car insurance.

This can seem alarming and invasive, but car insurance companies rely on credit scores to assess how risky it will be to insure a driver.

However, even if you have a poor credit history, you can still decrease your auto insurance premiums by using an online auto insurance comparison calculator. Compare auto insurance rates now by using our FREE tool above!

Is it legal to use credit scores to determine auto insurance rates?

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While it may seem unfair or illegal for a car insurance company to use your credit history and score when determining the price you for auto insurance, it makes sense for car insurance companies to do so.

FICO, a major company that is hired to generate credit-based insurance scores reports that about 95 percent of auto insurance companies and 85 percent of homeowners insurance companies will use credit-based insurance scores in order to determine risk classifications.

These companies will examine several pieces of your credit, including payment history, how long you have had credit, accounts in collections, outstanding debt and any history of bankruptcy to come up with your premium rate.

This information is used to determine your credit-based insurance score. To find out if credit ratings can be used to help determine the price of your auto insurance policy in your own state.

How is my credit score weighed when determining the price of my policy?

There are a few different credit reporting companies that your insurance company can use to help create a policy premium that factors in your credit history.

These companies, such as FICO, will generally look at five general groupings to formulate how much of a risk you will be for the auto insurance company.

  • Payment History – This accounts for approximately 40 percent of your credit-based insurance score and looks at how well you have paid your outstanding debts during your credit history
  • Owed Debt – This area simply gives weight to how much debt you currently have and can account for up to 40 percent of your score
  • Length of Credit History  How long you have had a line of credit can count up to 15 percent of your total credit-based insurance score
  • New Credit Inquiries  How often you’ve inquired about lines of credit can impact your overall credit score up to 10 percent
  • Credit Mix – Finally, the different types of credit you have, such as car loans, credit cards, student loans, and mortgages will account for about 5 percent of your credit-based insurance score

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Information that Cannot be Used to Determine Your Credit-Based Insurance Score

While a lot of factors go into determining the premium you will pay on your car insurance policy, there are many other personal pieces of information that insurance companies are not allowed to use when deciding on the rates you will pay from a credit-based insurance score.

These details include:

  • Age
  • Income
  • National Origin
  • Race
  • Color
  • Gender
  • Marital Status
  • Employment, occupation, and income history
  • Location of Residence
  • Interest Rates Paid
  • Rental Agreements
  • Child or Family Support Obligations
  • Specific types of inquiries into your credit reports, such as account review inquiries, employment inquiries, and promotional inquiries.

Can I improve my credit-based insurance score?

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Just like you can take steps to improve your credit report and score over time, you can also take similar steps to improve your credit-based insurance score. When your normal credit score and history improves, so will your credit score, which will lead to better rates over time.

You can improve your score by keeping your balances low on existing credit cards, not opening new accounts, making payments on time, and paying off any outstanding debts you have.

If you are behind, do your best to catch up on those accounts and stay current.

You should also take a good look through your own credit report at least once per year. You should look for any inaccuracies in these reports, including accounts that were never yours.

Be sure to report any errors immediately to the applicable credit reporting agency in order to get them corrected and removed from your report.

Checking your own credit reports and making sure they are accurate can help you get the best insurance premiums.

Other Factors that Help Determine Your Premiums

While credit scores account for a sizeable portion of determining the rate you pay for car insurance premiums, there are several other factors used by auto insurance companies to come up with the rates that you pay.

Your driving history, including tickets, accidents, and claims are considered in their calculations. Factors that you cannot control, such as how old you are and your gender also can affect the price you pay for insurance on your vehicle.

The length of your driving record and if you have taken any driver’s education or defensive driving courses will also be considered when determining your auto insurance premium.

It can be disconcerting and feel like an unfair invasion of privacy to learn that auto insurance companies can and do check your credit scores and history to help determine the rates that you pay.

However, it is important to know that there are several other factors that help determine your rate and even factors that they cannot legally take into consideration when deciding on the cost of your auto insurance premiums.

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