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do credit scores affect premiums

Do Credit Scores Affect Premiums?

March 7, 2023


Do Credit Scores Impact Insurance Premiums?

In the United States, it’s common to use credit scores to gauge auto insurance or home insurance rates. Depending on the insurance company and depending on whether you choose to opt-in or not (although this may not always be a choice), you can use your score as one of the many factors that will go into pricing your policy. This can be a good or bad thing depending on the circumstances of your current credit score. Most states do not have rules that forbid them from accessing your credit score when determining risk calculations, and nearly every insurer in the United States will check your credit.

To answer the question, “do credit scores impact insurance premiums?” – yes, they do. Like with any variable that impacts your insurance premiums for auto or home, the “riskier” you are perceived to be, the more likely that you’ll pay more for your insurance.

Here’s a breakdown.

To what extent are your insurance rates affected by your credit score?

A poor credit score can cause your insurance rates to go up. An extremely poor credit score may very well double your insurance rates. Good scores can result in savings, and extremely good scores can serve as well as a loyalty or claims-free discount.

Having poor credit rates could raise your insurance premiums as much as 59% compared to if you had average credit. On the other hand, having a good credit score can save you more than 20% a year.

The impact that credit ratings will have can differ between states, and further differ between various insurance companies.

Remember credit scores range between 300 and 850. These will then be broken down into several further tiers, ranking from poor to excellent.

  • Excellent rating: 800 and 850
  • Very good rating: 740 and 799
  • Good rating: 670 and 739
  • Fair rating: 580 and 669
  • Poor rating: 300 and 579

That being said, this doesn’t mean that a specific score will match a specific premium. When determining your insurance premiums based off of your credit score, they’ll take your full credit report and feed it through an algorithm, which is then used to calculate an “insurance score.”

Your consequential insurance score will therefore not measure how “creditworthy” you are, but rather how risky you will be perceived from an auto or home insurance perspective.

How exactly do credit scores impact your home or auto insurance rates?

Bottom line: your credit score can have a significant impact on your car insurance prices. Virtually every major insurance company uses credit scores as a factor.

Your score may also be referred to as your FICO score. It’s based on five different factors, which all pertain to your current situation as well as your borrowing history.

These five factors are as follows:

  • Any new credit will account for 10% of your score.
  • A credit mix will account for 10% of your score.
  • The length of your credit history. This will account for 15% of your score.
  • The amount of credit you owe will account for 30% of your score.
  • Your payment history totals 35% of your score.

How much your actual score impacts you vary between states. Drivers can even be penalized for having a lack of credit history, which from many insurers’ perspectives will be the same as having a poor credit history. Rhode Island and New Jersey prohibit insurance companies from penalizing auto policyholders for having an absence of credit history, so drivers in these states may benefit from having no credit history than a poor one. New York is the state that most heavily weighs its insurance premiums based on credit score, with an average increase of 106% for poor scores.

Will insurance companies check your credit score?

To receive auto insurance, your credit score will be checked in virtually every case. In some capacity, almost every major auto insurer will use a driver’s credit score, with the exception of states like Hawaii, California, Michigan, Washington, and Massachusetts – these states all forbid the practice.

Credit rating for many insurance companies tends to be a decent indicator of how many claims a driver will inevitably file. This is the reason why so many insurers will check your credit. It enables insurance providers the chance to pair more expensive rates with drivers who will statistically use their insurance more. To check your credit score, an insurer will ask for your Social Security number in the process of providing a quote. This will be used to check your credit. You may be able to receive a quote from some insurers without an SSN, but it may be requested before you get your final price.

Does receiving a home or auto insurance quote affect your credit score?

Receiving a quote for car or home insurance should not impact your credit score. Checking it when getting a quote is called a “soft pull,” and this process only verifies some basic info. A hard pull, on the other hand, offers you a full credit history and may temporarily reduce your credit score. It can apply to many lenders for a short period of time but know that a buildup of these “hard pulls” can lower your score substantially.

Note that the majority of auto insurance companies check your credit before they give you a bidding quote, including companies like USAA, Progressive, Allstate, Liberty Mutual, State Farm, and Geico. Give Hitchings Insurance a call to discuss credit score impacts on home and auto insurance, or ask us any further questions that this article may have left unanswered.

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