Laura Berry is a former State Farm insurance producer and insurance expert.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products, including home, life, auto, and commercial, and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, mainly in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers Insurance CSR 4 Years

UPDATED: Oct 14, 2021

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Important facts to know...

  • Auto insurance companies personalize premiums by using several different personal factors to set your rates
  • In most states, providers are free to use details from your credit report to assess your likelihood of filing a claim
  • State officials in California, Massachusetts, and Hawaii prohibit carriers from using credit to determine rates
  • Insurers don’t use everything on your credit report when assessing your score because items can be discriminatory
  • When you have poor credit and a perfect driving record, it could disqualify you from receiving preferred rates

Having bad credit can affect several aspects of your life.

Not only can you have trouble buying a car when you have a spotty credit history, you can also have trouble finding a good-paying job. Nowadays, service providers, employers, and creditors all look at an applicant’s credit before they decide if they want to build a relationship with the individual.

Enter your zip code above to see how much your credit affects your car insurance rates!

If you’re lucky enough to find a good deal on a car even with your blemished credit score, there’s a huge likelihood that your credit will impact both your loan interest rate and your car insurance rate.

As a consumer, it’s best to understand why you pay the rates that you pay for your insurance coverage. Here’s how credit is used to set your insurance rates:

Can insurance carriers look at your credit when assessing your insurance application?

The body that regulates practices and oversees transactions in the insurance market is called the Department of Insurance.

There’s a department in each state with officials who make major decisions about premium filings and what’s acceptable in the industry. This is why the laws about rating factors and requirements vary from state to state.

Using credit to give drivers discounts or to classify them as high-risk insureds is a common practice.

In most states, officials see the relationship between a person’s credit and their risk class. Companies feel like someone who has trouble paying their bills will likely file a claim if they have a loss. This is why using credit is allowed to determine rates.

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Do all states allow insurance companies to check your credit?

Using credit to calculate an applicant’s rate and a policyholder’s renewal rate is permitted in almost every state. There are, however, a few exceptions to the rule.

The lawmakers in California, Hawaii, and Massachusetts have all decided that raising someone’s rates because they have defaulted on their credit is a discriminatory practice so the practice is prohibited.

Do all insurance companies use credit to set individual insurance rates?

Insurance companies that are permitted to use credit aren’t required to do so.

There are still companies that don’t factor in an applicant’s credit information when calculating a rate. If you have a low credit score with some splotches on your record, look for these carriers and you may be able to keep your premiums fairly low.

You Have the Right to Know When Insurers Use Your Credit

If you live in one of the 47 states that permit carriers to check your credit, look through the privacy notices and disclosures that you receive when you get quotes or fill out an application. When an insurance company does use your credit, they must tell you in writing.

If you proceed with your application, you’re agreeing to let the company pull your report. If you tell the company that you don’t want them to pull your credit, they legally can’t.

Unfortunately, that’s not an effective tactic because the carrier can deny your application for failing to comply with the terms and conditions laid out in the contract.

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Insurance Companies Don’t Use a Traditional Credit Report

If the carrier uses credit to put you in a risk class, they won’t use your traditional credit report that you can request through Transunion, Equifax, or Experian.

Instead of using this type of report, insurers will order a credit-based insurance score through a third-party agency that uses a proprietary formula to calculate your score.

What type of information is used to calculated an insurance score?

Most of the big name insurers will order insurance score reports through companies like FICO and LexisNexis. While each of the two agencies has a different scoring system, the information that’s used to decide on a final score is pretty similar in nature.

It’s up to the company to decide which company has the most reliable system and which report is more affordable.

The traditional credit reports consists of about 130 elements. Only around 30 of these elements are used in the equation to create an insurance score. Here are some of the items that will be cherry-picked from your credit report when it’s being reviewed for insurance purposes:

  • How well you have made payments to creditors in the past years
  • How much debt you have in your name
  • How long you’ve had an established credit history
  • How many new credit accounts you’ve opened recently
  • The mixture of account types that are found in your credit file

What factors can never be used to calculate a credit-based insurance score?

Insurance scores can’t employ most of the other factors on your credit because they don’t have any type of relation to claims predictability. Some of the other factors on your credit report would be considered discriminatory if they were used to calculate insurance rates.

Some details that are prohibited from being used include:

  • Race, religion, or national origin
  • Income
  • Gender
  • Age
  • Marital status
  • Current interest rates
  • Inquiries for employment
  • Child support obligations
  • Participation in a credit counseling program

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How much will your credit affect your premiums?

Since credit isn’t the only factor that’s used to set your rates, it’s difficult to say just how much more you’ll pay with bad credit. Some state officials allow credit to have a bigger bearing on your insurance than others.

People with poor credit who live in Michigan, South Carolina, Nevada, and Florida see a huge jump in rates with clean driving records.

If you want to find out how much credit will affect your rates in your state, you need to get personalized insurance quotes. One way to get a quick quote is to use a comparison tool. Be sure to be realistic when estimating your credit score and you’ll be better able to estimate costs.

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