Your credit score or rating is an unfortunate but necessary part of modern life. Getting a loan for your house, leasing a car, or applying for a credit card are all times when your credit history plays a crucial role. But your credit score can also impact your rates. The worse it is, the higher your premium.
Insurers use many factors to determine your rates. These factors are usually small facts about you and your driving history. These details help them assess your risk as a customer and driver. Your credit history is one of the first things insurance companies consider. Other common rate factors include:
You should note that some states outlaw credit scores as a rate factor. The reason is that there’s a debate about the fairness of using credit over other pricing methods, such as your driving record or claim history. The following states have banned or limited insurers’ use of your credit:
- California
- Hawaii
- Maryland
- Massachusetts
- Michigan
- Oregon
- Utah
- Washington
This article will equip you with the basics of credit scores as a rate factor. This includes the following key information:
- Why insurers use credit scores
- How they use it
- Credit score vs. insurance score
- Why some states don’t allow this practice
- How to raise your credit rating
Why Insurance Companies Use Credit Scores
Credit card companies and banks use your credit score to see how reliable you’ll be. Similarly, insurers will use your credit history to decide if you’ll be reliable in paying your monthly bill. If your credit is poor, it may indicate that you won’t pay your rates on time.
Lower Credit Scores Indicate a Higher Likelihood of Accidents
Per the Insurance Information Institute (III), research suggests that having a lower credit score shows a high potential for getting into an accident. This is because low credit scores display less financial and personal responsibility. Insurers use your credit rating because of these statistics. They also do it because of how reliable (or unreliable) it paints you as a customer.
How Insurers Use Credit Scores
Insurance companies use your credit rating as a way to determine your risk. If all of the rate factors and data point to you being more of a liability, you’ll either not be able to buy coverage or your premium will be expensive.
Extremely low credit scores will likely result in you having high rates. Your provider may require that you purchase expensive high-risk coverage because of this. These non-standard policies are for drivers that insurers believe expose them to a higher degree of risk.
Credit Score vs. Insurance Score
There are two types of scores that many people refer to in finance. Your credit score and insurance score. You may also see providers call an insurance score a credit-based insurance score. This can cause plenty of confusion if you’re researching the two terms.
Below are definitions for each term and the differences between them:
Credit Score
A credit or FICO score is a number that generates based on a credit report. Your credit report will show information about your previous loans and accounts with lenders. Lenders, such as banks and credit card companies, audit your credit rating before giving you any money.
Credit-Based Insurance Score
Carriers will usually use a credit-based insurance score to help determine your rates. They’re meant to predict future losses. If yours shows that you’re at a higher risk to produce losses or file claims, your rates are likely to be high. Several different companies produce these scores for insurers to access and use.
Here’s what usually makes up a credit-based score:
- Payment history. This shows all of the payments you’ve made in the past and whether you’ve been reliable in making them. Insurers refer to not making payments as delinquencies in your credit.
- Current debt. This will show how much outstanding debt you currently have.
- Recent credit. The amount of credit you’ve applied for or received recently.
- Length of history. How long your credit history is. This also shows the length of each line of credit that you’ve had.
- Credit type. This will show the type of credit you’ve had in the past (e.g., credit cards, loans, mortgages, and car leases).
Insurers will use the information above to determine your rates. They’ll also use it to assess whether they want you as a customer or not. It’s important to note that your age, gender, marital status, ethnicity, address, and income factor into your credit-based insurance score.
Why States Prohibit the Use of Credit Scores
The practice of using credit scores as a rate factor is a widely debated subject. Many feel the use of these in the insurance industry is unfair. For this reason, some states don’t allow the use of your credit history as a pricing factor.
One reason many believe using credit scores is unfair is that it doesn’t necessarily show you’re prone to getting into car accidents. Another is that a consumer credit rating doesn’t correlate with accident frequency as much as your driving record. Drivers with poor credit but a clean driving record could pay much more than bad drivers with good credit. At least in theory. This thinking has led some states to steer insurers away from this practice.
While some states don’t allow insurers to use your credit score, they limit or prohibit it in different ways. Here’s a list of each state that prohibits or limits using your credit rating for insurance and how they do it:
California
Your credit rating won’t affect your rates in The Golden State. California prohibits the use of credit scores to determine home and auto premiums. They also don’t let insurers use your credit history to make underwriting choices. This includes deciding to cancel or deny a policy based on your credit rating.
Hawaii
Like California, Hawaii bans providers from using your credit score as a rate factor. The Aloha State has also outlawed using these scores to make any underwriting decisions, such as canceling or denying your policy. But keep in mind that they do let insurers use it to make decisions for homeowners coverage.
Maryland
Maryland allows insurers to use your credit score as a rate factor, but forbid them from using your rating as a way to make any underwriting decisions. In other words, they can’t refuse to sell you coverage because of your credit rating, but your rates may be much higher if the rating is low.
Massachusetts
In Massachusetts, your credit score isn’t a factor in determining your premium. Just like many of the other states on this list, insurers in Massachusetts can’t use your credit history as a way to cancel, deny, or non-renew your policy.
Michigan
Michigan bans insurers from using your credit rating to help select your rates. Providers also may not prevent you from buying coverage if your credit score is low.
Oregon
Oregon insurers aren’t able to use your credit rating to deny you coverage, but can use them to determine your rates. Though, they’re only able to use certain info from your credit-based insurance report. Be sure to speak with your agent about what credit info your insurer uses.
Utah
Utah allows insurers to use your credit score as a rate factor. The difference in Utah is that it can only gain you a discount. It won’t cause your rates to rise. After you’ve been a customer for 60 days, your provider can’t use your credit history as a way to deny, cancel, or non-renew your policy.
Washington State
Washington State prohibits insurers from using credit scores as a rate factor. On June 20, 2021, The Washington legislature passed a law that banning this practice. This law is in effect for three years after the COVID-19 pandemic is officially over (the government would be the one to declare it as over).
Frequently Asked Questions
How can I get a better credit-based score?
The best way to improve your credit score or credit-based insurance score is to maintain a level of financial responsibility. Here are the best ways to achieve that:
- Don’t miss any payments
- Have a long credit history with little to no mistakes. Show that you’re reliable.
- Have current credit that’s in good standing with lenders.
- Avoid outstanding debt if you can help it. More debt can put you even further underwater.
Is your insurance score the same as your credit score?
The short answer is no. Your insurance score is a set of information about you and your credit history. Insurers use it to figure out how risky of a driver and customer you are. A credit score is simply a number that a credit report produces. The higher the number, the more reliable you are with handling credit.
What is a good credit score for car insurance?
Insurers most likely use the same categorizations as credit reporting companies in terms of what defines a good or bad score. Here is an example of how Experian defines users based on credit history:
- 800-850 – Exceptional
- 740-799 – Very good
- 670-739 – Good
- 580-669 – Fair
- 300-579 – Poor
Do quotes affect your credit score?
Quotes don’t affect your credit score because insurers use what’s called a “soft inquiry” to check your overall credit score. This differs from a “hard inquiry” that occurs when you apply for a credit card or take out a loan.
