Impact of Credit Scores on Auto Insurance

Your credit score has a vital role in settling car insurance rates. A high credit score will decrease your car insurance price, and low credit will make things more costly for you. Therefore, it can be said that there is a significant impact of credit scores on auto insurance. 

As per a widespread analysis of the top-most insurance companies in the country, it is deduced that a poor credit score more than doubles the insurance rate. On the other hand, a good credit score can decrease rates up to 24% compared to the prices you would have to pay with an average credit score.

It should be noted that asking for an estimated auto insurance quote does not impact your credit score. However, almost every insurer will view your credit report to determine whether you are a good credit risk or not.

Credit scores are taken into account when applying for new lines of credit, leasing an automobile, or receiving a home mortgage. They also impact your auto insurance bill/premiums, like how your driving history, payment record, and marital status does. 

Credit Scores May Impact Auto Insurance

Many car insurance companies in the U.S. utilize insurance scores based on your credit to calculate the financial risk when quoting a rate to consumers. This practice has been banned in some states, including Massachusetts and California.

Following are the factors you must know regarding how credit scores are used by insurers to determine car insurance amounts.

Credit Scores & Insurance Scores Based On Credit

FICO or credit scores are derived from the details in your credit report and are important for lenders and creditors to identify whether you are a good or bad credit risk. These credit scores also interpret interest rates and the ability to qualify for a loan.

As per the Insurance Information Institute (III), insurance scores based on your credit aren’t taken into consideration for employment, net income, or any other personal details. Elements like your payment record and overall debt are used to determine the level of risk you may be to an auto insurance lender.

How Do Credit-Based Insurance Scores Work?

Insurance companies in the U.S. use credit scores based on your insurance in addition to your driving record, claims history, and several other factors in determining whether you are likely to make timely payments and chalk out insurance rates.

In accordance with the policies of the Insurance Information Institute, you will be eligible for lower insurance rates if your credit-based insurance score is high if you have an untainted driving record and zero disputes on your credit report. The score is just one of the several factors used to determine your insurance premium. You may be considered a bad insurance risk if even one of the aforementioned factors is unsatisfactory.

Why Are Credit-Based Insurance Scores Used By Insurance Companies?

Research proves that insurance scores based on your credit are an accurate prediction of the potential risk involved with debtors. Quantitative analysis demonstrates that people with a lower insurance score are more probable to file a dispute or claim. In contrast, users with a high credit score are less prone to potential risks and are determined a good credit risk compared to their lower-scoring parallels.

Independent research done by the Federal Trade Commission to better understand the relationship between credit history and risk found that insurance scores calculated on the basis of your credit are helpful in predicting credit risks.

Types Of Inquiries On Your Credit Report

As per the Consumer Financial Protection Bureau (CFPB), the two types of inquiries on your credit report are; soft inquiries and hard inquiries. 

1. Hard inquiry 

Inquiries and checks by creditors show up on your credit report if and when you apply for new lines of credit. According to the Consumer Financial Protection Bureau, these are classified as hard inquiries which impact your credit report and scores since they indicate how regularly you apply for new debts. Recent hard inquiries are counted in a creditor’s decision-making as it indicates that a recent debt has been added to your account.

2. Soft inquiry

A review of your credit report, creditors evaluating current accounts, and potential lenders pre-screening your report are known as soft inquiries on your report. As claimed by the CFPB, these inquiries do not have an impact on your score.

Factors That Could Affect Your Credit Score

Beneficial factors

• Outstanding long-term credit record.
  
• Timely payments and no late fee applied to your credit card.
  
• Running accounts with good credit history.

Adverse factors

• Late payments.
  
• Being delinquent on debt payments.
  
• A lot of debts.
  
• Not well-established credit history.
  
• Multiple hard inquiries on your credit report.

KNOW YOUR CONSUMER RIGHTS

Your credit-based insurance score report can be obtained from LexisNexis, and any negative entries in your credit report can be disputed with them. Insurance companies don’t have the authority to make changes to your credit score. 

Your report can be procured free of cost under the Fair Credit Reporting Act (FCRA). If any incorrectly registered negative entry is observed on your credit history, you are right to protest and get these erroneous entries rectified and removed from your report. 

Inquiries, Identity Theft, And Fraud

A free-of-charge replica of your credit report can be attained every 12 months as per the FCRA and Federal Trade Commission. It is advised by the FTC to review your credit report annually to avoid hard inquiries and identity theft or fraudulent activities. You can request a copy of your report from the three major credit bureaus; Experian, Equifax, and TransUnion, or at annualcreditreport.com. 

Experian states that hard inquiries on your credit report don’t always indicate identity theft. Your report is examined by lending institutions and companies when you are seeking an auto loan or house mortgage from more than one creditor for the best terms and interest rates. The companies or their abbreviations emerge on your credit report. If you remain aloof as to why your report was accessed, the lending institution(s) should be contacted directly and immediately.

According to Experian, if you notice an inquiry on your credit report from an unrecognized lender when you haven’t applied for a loan, it could be a credit fraud trying to get an insight into your report. Noticing and identifying service inquiries you haven’t applied for shows that new lines of credit are being applied for using your identity. 

FTC suggests taking immediate action and following these steps if you have been a victim of identity theft:

• Contact one of the three recognized credit bureaus and got a fraud alert added to your credit report. This information will be updated with the other two credit bureaus as well. The fraud alert addition is valid for 90 days and is free of cost. Creditors and lending institutes have to take extra measures before lending you money to verify your identity.
  
• FTC recommends that you request receipts and keep a record of communication with businesses or companies related to affected accounts or doubtful inquiries.
  
• An identity theft affidavit should be registered with the FTC, which can then be used to file a case with the authorities. A report from the authorities and the affidavit together can assist you in resolving the issue with credit reporting agencies, lenders who may have given the debt to the identity thief, and debt collectors. 

Outcome

Receiving an insurance rate from auto lenders will not affect your credit score as your credit is checked with a soft pull. According to research, a bad score increases yearly rates by 61%, whereas a lower credit score notably affects insurance rates. So the impact of credit scores on auto insurance wholly depends on the responsible usage of lines of credit by the user.