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 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 excellent and poor credit. The average increase is 69 percent, or about $965 a year.
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.