Does Changing Car Insurance Affect Credit Score?
Get the definitive answer on whether managing your car insurance impacts your credit score. Understand the real factors at play.
Understanding the interplay between car insurance and credit scores is a common inquiry for many consumers. Car insurance premiums are influenced by various data points, and credit information often plays a role in how insurance companies assess risk. Consumers frequently wonder if seeking new car insurance quotes or changing providers might negatively impact their credit score. This article will explore how credit information is used in the car insurance industry and clarify the direct effects on your credit score.
How Car Insurers Use Credit Information
Car insurance companies often utilize credit-based insurance scores to help determine premiums and assess the likelihood of future claims. These specialized scores are derived from information in an individual’s credit report but are distinct from traditional FICO credit scores used by lenders. Insurers use these scores because research indicates a correlation between how individuals manage their credit and their propensity to file insurance claims.
The factors contributing to a credit-based insurance score include payment history, the amount of outstanding debt, the length of one’s credit history, recent applications for new credit, and the mix of credit accounts held. For instance, timely payments and a diverse credit portfolio can positively influence this score. Conversely, missed payments or a high amount of debt relative to available credit may lead to a less favorable score. This score is one of many elements insurers consider and does not include personal information such as income, occupation, gender, or marital status.
In most states, a better credit-based insurance score can lead to lower insurance rates, as it suggests a lower risk of filing costly claims. While some states have restrictions on its use, the practice is widespread across the United States.
Credit Inquiries and Your Score
When individuals seek car insurance quotes, a common concern is whether this action will negatively affect their credit score. Insurance companies typically perform a “soft inquiry” on a person’s credit report to generate a quote. A soft inquiry, also known as a soft pull or soft credit check, occurs when a company reviews an individual’s credit report for informational purposes, such as pre-approvals or background checks.
This type of inquiry does not impact one’s credit score and is often only visible to the individual and the company that performed it. This means that obtaining multiple car insurance quotes from different providers within a short period will not harm a credit score.
In contrast, a “hard inquiry,” or hard pull, occurs when a lender checks credit as part of a formal application for new credit, like a loan or a credit card. Hard inquiries can temporarily lower a credit score by a few points and remain on a credit report for up to two years. However, car insurance quotes almost exclusively result in soft inquiries, protecting one’s credit score during the shopping process.
Factors Beyond Credit Affecting Rates
While credit information plays a role in car insurance pricing, numerous other factors significantly influence premium costs. One primary determinant is the individual’s driving record, including past accidents, traffic violations, and claims history. A clean driving record generally leads to lower rates, as it indicates a lower risk of future incidents. Conversely, a history of infractions or frequent claims can substantially increase premiums.
The type of vehicle being insured also impacts rates, considering its make, model, age, safety features, repair costs, and susceptibility to theft. More expensive cars or those with higher theft rates typically cost more to insure. Geographical location is another important factor, as rates can vary considerably based on the ZIP code due to differences in traffic density, accident rates, crime levels, and local weather patterns.
Further considerations include demographic factors like age, where younger, less experienced drivers often face higher premiums, and annual mileage, as driving more miles increases exposure to risk. The specific coverage limits and deductibles chosen by the policyholder also directly affect the premium. Selecting higher coverage limits or lower deductibles typically results in higher costs, while opting for higher deductibles can reduce the premium.