CarInsurance.com Insights
- Insurers use credit-based insurance scores, not FICO scores, when calculating premiums.
- Soft credit checks won’t affect your score, so you can shop for quotes freely.
- Some states ban credit use for insurance, so pricing rules vary.
- Poor credit can dramatically increase premiums –typically by more than 100%.
- Improving credit habits can lead to lower rates over time.
If you’re shopping for a new car insurance policy, a credit check will be part of your insurance quote in most states.
But insurance rates are not purely calculated based on a credit check. Other variables are at play, including where you live, the type of car you drive, your age and your driving record, which will match the rate you pay as closely as possible with the cost of potential claims.
Charles Blankson, chair of marketing for the University of North Texas G. Brint Ryan College of Business, says it’s generally reasonable to factor in a driver’s credit score when setting premiums. Still, there should be some flexibility in a two-tiered approach.
“It may be best to take calculated risks and make policies available at affordable rates to those with lower credit scores,” he says.
Why do auto insurers check your credit?
Most auto insurance companies use a credit check when you request a quote, especially in states that permit credit-based pricing.
But they aren’t looking at your traditional credit score (like FICO or VantageScore). Instead, they build a credit-based insurance score, which uses elements of your credit history to help predict how likely you are to file a claim.
States that restrict or prohibit credit use to establish rates
Some states have banned or restricted credit-based pricing:
- Banned: California, Hawaii, Massachusetts, Michigan, Maryland
- Limited use: Some other states limit how and when it can be used (e.g., for renewals but not new quotes).
Check your state’s insurance department to confirm local rules.
Do insurance credit checks hurt your score?
No. When insurers check your credit, it’s a soft inquiry, which doesn’t affect your credit score or appear on reports used by lenders. You can shop for quotes without fear of damaging your credit.
How credit affects your car insurance premium
Drivers with poor credit may pay up to 70% more on average for the same coverage than drivers with excellent credit, according to industry studies. But other factors also matter, such as driving history, location, age, and vehicle type.
What’s in a credit-based insurance score?
Insurers typically consider:
- Payment history
- Credit utilization
- Credit account age
- Recent credit inquiries
- Types of credit used
Notably, these scores do not consider:
- Income
- Race or ethnicity
- Gender
- Marital status
- Occupation
“Traditional consumers with good credit scores are an essential base for a solid insurance business. These consumers are consistent about paying their bills and insurers should reward them with the best rates,” Blankson says. ”On the other hand, those with low or weak credit scores may have fallen into a bad patch and had difficulty paying bills for a period, but that doesn’t automatically mean that they’re going to be reckless on the road. These individuals could be college students, young adults and others who have faced past financial struggles but are responsible and good citizens who aspire to improve their credit over time.”
What are the pros and cons of using credit to set premiums?
Blankson says there are pros and cons of using a driver’s credit history when setting car insurance rates.
Pros:
- Identifying and rewarding drivers with good credit habits can yield consistent revenue and business stability for insurers.
- A consumer’s credit history says a lot about them. They can demonstrate reliability in paying bills and it may be appropriate for those drivers to receive a break on premiums. This provides an uninterrupted flow of revenue for the insurance carrier.
- Accessing low rates due to strong credit can be a morale booster for consumers who may feel motivated to keep their credit rating high.
Cons:
- Insurers may miss out on potential customers by factoring credit ratings into premium prices, and some consumers may have difficulty obtaining affordable coverage.
- If insurance prices are out of reach due to low credit ratings, some drivers may opt to drive without insurance – that’s not good for insurers or society.
- In the long term, an insurance company’s growth could be limited if some consumers are priced out of the market; this can have a cascading effect where lower sales lead to lower profits and lower ROI.
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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. Drivers with poor credit pay 117% more than drivers with good credit — an average of $4,126 annually for full coverage car insurance.
“Sometimes, customers with poor credit scores may be required to pay the entire premium for a six-month policy upfront. Customers with low credit scores sometimes won’t qualify for monthly billing, or they may need to pay a large percentage of the policy up front and the remainder monthly,” he says.
Can you get insurance without a credit check?
Some insurers offer quotes without using credit, especially in states that restrict it. Usage-based insurance (UBI) programs and regional insurers may be alternatives. Ask insurers directly if they require a credit pull.
“In any case, fair or not, credit scores often impact one’s insurance premiums,” Blankson says. “So, if you want them to go down, it makes sense to try to make your credit score go up.”
How to improve your credit and lower car insurance costs
- Pay all bills on time
- Keep credit utilization under 30%
- Avoid opening too many new accounts
- Review your credit report for errors — at least once per year
- Maintain older credit lines if possible
Improving your credit won’t deliver instant savings, but over time, it can significantly reduce your insurance costs.
Frequently Asked Questions: Credit and car insurance
Does shopping for insurance hurt my credit?
No. Insurers use soft inquiries that do not impact your credit score.
Why do insurers care about credit at all?
Studies show a correlation between credit behavior and likelihood of filing claims.
Can I ask for a quote without a credit check?
Yes, especially in states that prohibit it or through usage-based insurers.
Is it legal to use credit in setting insurance rates?
Yes, in most states, but several have banned or restricted the practice.
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