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UPDATED: Aug 7, 2019
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It seems like almost everything you do financially will have an affect on your credit.
If you’re gearing up to buy car insurance, you might be curious to learn whether or not your mission to find affordable coverage will affect your FICO score or the inquiries that show up on your credit report through each of the three bureaus.
Read this guide to the relation between car insurance quotes and credit scores so that you’ll know what you should and shouldn’t be concerned about.
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Why is comparison shopping so important?
Every auto insurance carrier sets their own rates for each class of driver. Some companies prefer to target specific segments of the market and others are priced competitively across the board.
Since insurers don’t advertise what types of risk they want to target, the only way to go about finding affordable auto insurance rates is to shop the market and compare quotes.
As you solicit quotes, you can identify which carriers are priced to earn your business and which aren’t.
Does shopping the market for auto quotes affect your credit?
As you start to compare the premiums and the rating systems from insurer to insurer, you might begin to wonder if your mission to find a bargain will affect your FICO score.
Luckily, credit scores aren’t directly affected by soliciting car insurance quotes.
In fact, the credit bureaus have no way of knowing that you’re requesting quotes in most scenarios.
It’s not until you apply for coverage and your credit-based insurance score is run that there may be a hit on your report.
Since these reports aren’t run until after you’ve applied, there’s not bearing on your credit while you’re just window shopping.
What is an insurance score?
While only some states allow insurers to look into an applicant’s credit history, the statistics released by the National Association of Insurance Commissioners show that 95 percent of auto insurance providers will use credit-based insurance scores.
These scores are used as a risk classification factor to determine how likely the policyholder is to file a claim by simply reviewing how they manage their own finances.
Since actuaries and claims trends have shown that people with lower credit scores tend to file more auto damage claims, it’s believed that credit-based insurance scoring is an effective way to help carriers charge adequate premiums while still offering some households special discounts.
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Will pulling the credit have an effect on the applicant’s score?
You might think that when your insurer does have intentions of pulling your credit that it can affect your report.
This is true some of the time, but the way that insurance underwriters request an inquiry on your report makes it so that there’s no effect on the score itself.
Insurance companies will place on the inquiry on your report, but it’s a soft hit that can’t have a bearing on lending decisions.
As a soft hit or involuntary inquiry, it will only show on your personal report and not on the public report that lenders have access to. The purpose
The purpose of reporting the soft hit inquiry is simply to show you who’s been accessing your credit report and when it was accessed.
You should be worried more about hard pulls affecting your credit. A hard pull refers to an inquiry when someone is actively seeking credit.
What does the insurance company look at when running your credit?
Now that you feel relief in knowing that your mission to find affordable car insurance won’t impact your credit, it’s important to learn how your credit might impact your insurance premiums.
Insurance scores don’t just use one piece of information on your credit to place you in a risk classification. Instead, the insurer will use several bits of information to assign a score.
Here’s what’s used and also how much weight each item is given:
- How well you’ve paid your loans and outstanding debt –40 percent
- How much debt you’re in at the time –30 percent
- How long you’ve had a credit file – 15 percent
- Have you applied for new loans or lines of credit – 10 percent
- What types of credit your have outstanding – 5 percent
What is a company prohibited from using when calculating an insurance score?
There are factors that can be used and there are factors that can’t. In fact, legislatures have passed a law that states specifically that insurers are prohibited from using details that might discriminate against a household.
These details are believed to be things that are out of your control and can’t possibly affect your risk class.
Here are some of the most common factors that can’t be used in credit scoring:
- Race or national origin
- Gender or marital status
- Occupation or employment history
- Income range
- Child support obligations
- Rental agreements
- Inquiries on the credit report for employment
How credit-based scoring differs from assessing risk
You might notice that some items that are prohibited from being used in credit-based insurance scoring are used to determine rates.
This is because there’s a difference between calculating a score and assessing how risky a driver is based on their experience and demographics.
Age, gender, marital status and local are all used to in rate calculations, just not in setting a tier for that applicant’s insurance score.
Other rating factors that are used include:
- Driving record
- Vehicle usage
- Where your car is parked
- Vehicle type
Will non-payments of premiums affect credit?
When you don’t pay your loan installments on time, your credit will show late pays and defaults. You might be wondering if this happens when you fail to pay insurance on-time.
Surprisingly, late payments don’t affect your credit but they can affect your reputation with insurers.
If you want to find affordable insurance, don’t worry about shopping around. When the insurers inquire, it has no affect on your score. Use an online rate comparison tool and start to see how much you’ll pay through leading insurers.
After you’ve had the chance to compare the insurance rates, you’ll be equipped with the knowledge that you need to buy auto insurance that will protect you on the road.
Start comparing car insurance rates now by entering your zip code in our FREE tool below!