Do They Run Your Credit for Car Insurance?

Car insurance companies commonly consider credit information when determining policy premiums. Understanding how and why this occurs can help consumers navigate the insurance landscape. This article clarifies the role of credit in car insurance, explains specialized scores, details how these scores influence premiums, and provides actionable steps for managing your underlying credit data.

Credit’s Role in Car Insurance

Car insurance providers frequently use credit information as a factor in their underwriting process. Statistical analysis suggests a correlation between a consumer’s credit history and the likelihood of filing insurance claims. Individuals with higher credit-based insurance scores tend to file fewer claims, leading insurers to perceive them as lower risk.

This process is distinct from a credit check performed for a loan or credit card. When an insurance company reviews your credit information, it typically involves a “soft inquiry” on your credit report. This inquiry is visible only to you, and it does not negatively affect your standard credit score. Credit information is also just one of many factors insurers consider, alongside your driving record, vehicle type, location, age, and claims history.

Credit-Based Insurance Scores Explained

Insurance companies generally do not use your traditional FICO credit score to set premiums. Instead, they utilize a specialized metric known as a “credit-based insurance score.” This score is derived from elements within your credit report but is calculated using different algorithms, designed to predict insurance loss potential, not loan repayment ability. While exact formulas are proprietary and vary among insurers, these scores assess how certain credit behaviors might relate to future insurance claims.

Information from your credit report typically influences a credit-based insurance score. This includes payment history, like on-time bill payments, and the amount of outstanding debt you carry. The length of your credit history, indicating how long you have managed credit, also plays a part, along with the types of credit you use (e.g., credit cards, loans). Recent applications for new credit can also be considered. While consumers can easily access their standard credit scores, credit-based insurance scores are not directly available to them.

Credit Scores, Premiums, and State Rules

A direct correlation generally exists between a credit-based insurance score and car insurance premiums. A higher score often leads to lower premiums, reflecting a perceived lower risk of filing claims. Conversely, a lower score may result in higher premiums, as insurers associate it with a greater likelihood of future claims.

The use of credit information in setting insurance premiums varies significantly by state. Some states have implemented strict limitations or outright prohibitions on this practice. For instance, a few states entirely ban the use of credit history for auto insurance rating. Other states may restrict its use, allowing it as a factor for determining premiums but preventing it from being the sole reason for denying or canceling a policy. These restrictions often stem from concerns about fairness or potential disparate impacts on certain consumer groups, leading regulators to question the link between credit history and driving behavior.

Managing Your Credit Data

Consumers can proactively manage the underlying credit data that contributes to their credit-based insurance scores. Regularly obtain and review your credit reports from the three major bureaus: Equifax, Experian, and TransUnion. Federal law allows a free weekly credit report from each bureau via AnnualCreditReport.com.

Upon reviewing your credit reports, identify any errors or inaccuracies. If you find discrepancies, you have the right to dispute them with the credit bureaus and the business that reported the information. The dispute process involves submitting a written explanation with supporting documentation; bureaus must investigate and correct verified errors. Adopting responsible credit practices, such as paying bills on time, maintaining low credit utilization, and avoiding excessive new credit applications, can positively influence the data reported on your credit file. These practices reflect financial stability, which can indirectly contribute to a more favorable credit-based insurance score.