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Why do insurance companies require a credit check?


Insurance companies run credit checks on applicants because risk assessors and actuarial studies have shown that a person's credit or financial history is a good predictor of insurance claims. Actuaries have found a strong correlation between credit history and insurance claims, and they have been taking credit history into account for some time in states where it's legal. We have noticed that some are even using more parts of the credit report (like payments over 30 days late) to pinpoint better risk assessment.

Insurance rates are not purely calculated based on credit history. There are other variables such as where you live, the type of car, driving record, etc. The goal of getting all of this information is to correlate the insurance premium rate as closely as possible with the actual cost of potential claims. If you are able to continue to have a clean driving record you should see if your insurance company allows for a safe driver discount or other discounts that will help absorb the higher rate due your credit rating.

There has been a noticeable shift toward lower rates that can be pinpointed to using credit along with many other rating factors. In the past, most insurers based premiums on a few rating factors like type of car, place of residence, age, marital status and driving record. Now most companies focus on at least 30 or more factors. Most companies always used the seven main components of a rate; now many have expanded that number to 300 or more. As a result, drivers with the best records have seen their rates drop as much as 25 percent. The ability to better pinpoint risk, saves all drivers in insurance costs.

But even people with poor driving records are likely to benefit. In the past, drivers with multiple accidents or major violations were only insured by high-risk insurers that charged hefty premiums because mainstream companies didn't have a system to price or manage them. Because of the ability to price and tier all drivers into a profitable pool, many companies are offering to cover the higher risk drivers, sometimes at much lower rates than those of high-risk insurers.

In which states is it illegal to use credit score as a rating factor?

By state law, California, Massachusetts and Hawaii do not use credit score to determine car insurance rates.

Is there an insurance company that does not use your credit score to determine your rates?

Not all car insurance companies will use a credit scores as part of the rating process. In some state,s Direct General does not use credit for rating. Most other carriers use it as a rating factor. The amount that a credit score can affect your rates in some states is governed by the state's insurance regulator.