There are a lot of misconceptions out there about how credit scores are used and in what scenarios they are used. Employment? Nope. College admission? Nope. Insurance? Actually, yes.
When determining what rates to offer you, most auto insurance providers will pull an insurance score that is based on or considers a person’s credit history and credit scores.
In addition to considering your credit scores, an insurance specific score considers items directly related to auto insurance concerns, so it may be slightly different than your general FICO® Scores. However viewing your FICO Scores would give you a good idea of where you stand as FICO Scores often play a major role in your insurance score.
Why do auto insurance companies use credit scores?
In short, the same reason lenders do—to predict risk. Auto insurance companies use credit scores to help figure out if a person can responsibly make payments. Surprisingly, studies have also shown that there is some correlation between low credit scores and a consumer’s likelihood to get into an accident (see cited studies below). Because of these things, auto insurance companies will often pull an insurance score. Certain score thresholds, set by the insurance company, will trigger different rate recommendations.
Are there any restrictions on how insurers use my credit reports and scores?
Yes, many. For example, an insurance company cannot consider credit inquiries that were a result of insurance rate shopping. Additionally, a person’s credit score cannot be the sole factor in determining insurance rates. Insurance companies are required to consider other factors.
The good news is, higher credit scores can help you get better rates on your auto insurance. Seems like just one more reason to responsibly manage your credit over time!
If you’re thinking about getting new car insurance, start by checking your FICO® Scores. This will give you an idea of where you stand so you can decide if it’s a good time to apply.