Call Us Toll Free: 1-855-430-7753
Go To Top
Get Personalized Car Insurance Quotes
Currently Insured?

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 how many insurance claims a person will file. Actuaries have found a strong correlation between credit history and insurance claims, meaning that people with bad credit tend to file more claims compared to those with good credit.

Insurance rates are not purely calculated based on credit history. There are other variables factored in, including where you live, the type of car you drive, your age and your driving record. The goal of getting all of this information is to match the rate you pay as closely as possible with the actual cost of potential claims. If you have a clean driving record but have poor credit, you should see if your insurance company allows for a safe driver discount or other discounts that will help absorb the higher rate due to 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.

Insurers check your credit, but use their own credit scoring system

It's also important to note that while insurance companies do check your credit history, they don't use your actual credit score. They use the information on your credit report to create their own score designed specifically for them. The credit score used by lenders predicts your ability to repay a loan. A credit-based insurance score predicts whether you'll file claims.

What insurance companies review when calculating your auto insurance score

Insurance companies say the most important factors for a good credit-based insurance score are a long credit history, minimal late payments or past-due accounts, and open credit accounts in good standing.

Past-due payments, collections, a high debt level, a high number of credit inquiries and a short credit history will hurt your score.

Your income, age, ethnicity, address, gender and marital status are not considered as part of the score.

The use of credit for setting premiums is controversial. Some consumer advocates say it unfairly penalizes people with low incomes or those who have job losses – the people who need cheap car insurance the most.

How much does insurance go up if you have poor credit?

Bad credit affects car insurance rates, as insurers consider those with poor credit to be more likely to file claims. CarInsurance.com commissioned Quadrant Information Services to compare full-coverage rates for drivers with good and poor credit. The average increase is 71 percent, or about $1,000 a year. If you live in one of the worst states for drivers with bad credit, you'll pay even more. But regardless of where you live, you can still save money on car insurance, even with bad credit. CarInsurance.com's rate analysis shows that the average driver can save about $2,000 a year by comparing rates to find cheap car insurance for bad credit drivers.

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 states, Direct General does not use credit for rating. Most other carriers use it as a rating factor. If you have poor credit and have some violations on your driving record, you may want to consider high-risk driver insurance.

Leave a Comment
Ask a Question
Tell us your thoughts
Leave a Comment

11 Responses to "Why do insurance companies require a credit check?"
  1. Anonymous

    I do not think it is fair to check your credit report in order to provide you car insurance. It seems to me that if they do, you pay more if your credit is poor -- which is not fair. Something needs to be done about this.

  2. Anonymous

    I do not believe checking your credit is fair. I have not been in a wreck, received a ticket or made a claim in over 10 years. Insurance companies should only check your driving record. That's what counts anyway. I have my premiums automatically deducted, the premium is never late. Is this another way to nickel and dime us to death?

  3. Anonymous

    Have you people not noticed that the insurance companies have a lot more control now then 20 yrs ago...thanks to bill clinton being greedy have gave them full control.. you cant buy a car with out it, you cant get your license with out it.. I'm waiting for walking insurance or bicycle insurance to be mandatory. I have been hit 2 times by non insured my rates go up due to them hitting me. They get to walk away. My house burns down and insurance company won't cover you have a nice life.

  4. Anonymous

    They have no right what so ever to look at my credit..None. I dont care about those damn studies...it all started with good old nasty bill clinton.. thanks to him you must have insurance.. what happen to thhis being a free country.. the world hates us. have you not noticed thanks to bush for that.

  5. Anonymous

    i think it crazy to use credit report on your insurance i have a clean driving my husband has clean driving and my daughter does also but the insurance is higher because of the credit its not our fault that we had lost our jobs and had trouble in the past and know they are pentlizing us for it know so my question is why have a good driving record

  6. Anonymous

    We know that "other" factors are included in figuring your insurance rate. What right (or legal recourse) do thay have to do this? Why do some companies check your credit when other companies do not? I was told by a financial planner that insurance companies are not allowed to do this. This seems an incidious way to extract more private information on you which can be viewed by who knows how many others. Weve paid our insurance premiums without fail for years. Insurance companies have always been a racket. You pay and pay on the off-chance you might need it. And yet, theyre legally required. I consider this harrassment.

  7. Anonymous

    Driving record has absolutely nothing to do with credit, insurance companies are always looking for a gimick to over charge and everyone is very much aware of this. I have written to my State Attorneys office with this concern. Everyone I know feel the same. We are sick and tired of being overcharged, especially in Connecticut. I will continue writing to everyone including newspapers.

  8. Anonymous

    judging a persons driving record based on credit is totally lame, we now have poor credit due to our newest sons medical bills, but my wifes driving record is clean and mine has a couple speeding tickets. our rates have continued to go up every 6 months with the same company weve had for the last 4 yrs. when i asked them why our rates havnt stayed the same or dropped they told me that they have been dropping but the yearly inflation of all things has made the payment rise. Total B.S. somone needs to pass a bill making it illegal to pull a credit report for auto insurance. as long as i pay my premium im holding up my end if i dont they cancel me! simple as that. ive had the same insurance co. screw up our policy 2 times in the past 4yrs should i base my rate on there service?

  9. Anonymous

    I dont think that its is right at all for insurance companies to do credit checks with a individual that has been with there company for over 4 years. And decide because he has bad credit to go up on the person insurance . That is discrimination.

  10. Anonymous

    The usual company line. I have been driving for 33 years, no driving infractions, no accidents, no tickets, and how I pay my bills has absolutely no bearing on how I drive. Do you people actually think anyone buys this lie? Its just another way to amass more personal info on everyone.

  11. Anonymous

    Thats bull I never had an accident and have never put in a clam... Its just more bull like everything else that is going up an ways they can take more an more Soon people will rise up an end all this

Disclaimer: Answers and comments provided are for information purposes. They are not intended to substitute informed professional advice. These responses should not be interpreted as a recommendation to buy or sell any insurance product, or to provide financial or legal advice. Please refer to your insurance policy for specific coverage and exclusion information. Please read our Terms of Service.

Ask Your Question Now


Penny will do whatever research it takes to find your answer ASAP.