A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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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 19, 2021

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Here's what you need to know...

  • Unlike car loans, the payments that you make to an auto insurance policy won’t affect your credit score
  • When you make continuous payments with an insurer, keeping your coverage active can lead to loyalty discounts and insurance discounts
  • In some states, credit history and other related factors can impact auto insurance rates
  • When credit is used to calculate auto insurance rates, the company will use something in the industry called an insurance score
  • The insurance score is typically calculated by third-party companies like FICO or LexisNexis
  • Insurance score can raise premiums by making a driver a bigger risk in the eyes of the insurer

Credit plays a crucial role in your financial life. Since poor credit can lead to the loss of a loan or even the loss of a job offer, it’s important that you set aside time to build a satisfactory credit history or eliminate the delinquencies that have already been reported. While it doesn’t happen overnight, the time that you spend building or rebuilding your credit can land you a better job and save you money on regular bills.

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There’s a long list of ways that you can build your credit. Managing your money, paying down debt, applying for credit, making on-time payments, and putting away money for a rainy day are all ways you can bump up your credit score so that you can secure a little to no interest auto loan. In the end, you need credit to build credit. While having an auto loan can help you improve your credit score, paying for the auto insurance you purchase to cover that car won’t. Credit, however, does have an impact on your policy. Read on and learn about how your credit report relates to car insurance.

How does credit affect your auto insurance?

Making payments for your auto insurance might not affect your credit, but failing to make that credit card payment or mortgage payment on time could affect your car insurance premiums. This is because many companies use credit-based insurance scores as rate determinants when they’re underwriting applications. When they run your credit report, they can see any late payment that you’ve had, which will have some form of impact on their decision. Having a positive payment history can do nothing but help you, which is why so many companies offer things like automatic payments and online billing, to make it easier for their consumer base.

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Why can credit be used as a basis for pricing auto insurance policies?

In the 1990s, insurance companies did a lot of research and determined that there’s a correlation between a person’s credit history and the likelihood that person will have a loss.

The statistics and studies show that individuals with poor credit histories have a higher chance of having an insured loss and filing a claim.

Those with good credit histories tend to fall in preferred or standard rating classifications because they present less of a risk since they have a positive history. This is why about 95% of auto insurance companies use insurance scores when classifying risk.

Is credit used in every state to calculate auto insurance rates?

Some officials feel that using credit is a discriminatory tactic that isn’t justified. Since it’s the state officials representing the Department of Insurance who regulate and monitor the market, the use of credit isn’t allowed everywhere. There are still states where the use of credit is prohibited because it’s believed that low insurance scores are disproportionately found in low-income groups. The states that currently don’t allow credit to affect insurance premiums include:

  • California
  • Massachusetts
  • Hawaii

How does a credit score differ from an insurance score?

Credit scores and insurance scores may be similar, but they aren’t the same thing. A credit score uses a long list of different factors to determine how likely you are to repay a loan. While some of these factors are used to calculate an insurance score, not all of the factors used for credit scoring are used for insurance scoring because it’s about managing risk exposure and not the ability to repay debt. You still want to make sure that you’re staying on time with bills like your cell phone payment or any utility bills you may have because insurers are going to see you making late payments and label you as high-risk. They want to make sure you’re going to be able to pay on time.

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What can be used to calculate an insurance score?

If you’d like to understand why you’ve been given a good score or a poor score, you’ll need to understand what’s used to drive an insurance score up or down. While each scoring company places a different weight on different credit records, each of the following will be used:

  • Credit mix
  • Pursuit of new lines of credit in the last 6 months
  • Length of credit file
  • Amount of outstanding debt
  • Length of time debt has been outstanding
  • Payment history on debt
  • Number of derogatory public record items

What can’t be used when reviewing a policyholder’s credit file?

Not every single personal detail of financial detail can be used in insurance scoring that’s used for assessing risk. Since personal information is believed to be separate from financial information, states have prohibited the following from being used to calculate a score:

  • Race
  • Marital Status
  • Age
  • Gender
  • Income
  • Occupation
  • Employment history
  • Location of residency
  • Child support judgments
  • Alimony or support payments
  • Inquiries on credit for employment or promotions

Does the insurance company’s inquiry affect your credit?

This is a very common question asked by those looking to get insurance. Buying insurance and making regular payments might not build credit, but it’s only natural to wonder if applying for coverage can damage your credit. When lenders and other companies check your credit, it’s possible that the hit can take your score down a few notches. This is only when you’re applying for credit and the inquiry is deemed a hard hit. Insurance companies do a soft inquiry, which does not affect your score.

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Can making my regular payments benefit me?

It might be frustrating to learn that you can make your regular premium payments and that doing this won’t build your credit. However, if you miss a payment or you regularly don’t pay on time, this hurts your credit; you still want to make sure you’re making your monthly payments on time.

Even though your credit score won’t go up, you’ll keep your continuous protection and may receive other types of rewards for being responsible.

Many companies offer what’s called a loyalty discount to their customers who stay with them for more than three to five years. A prior insurance discount can also be helpful if you have lapse-free insurance when you want to go shopping for coverage.

If you’re ready to shop for coverage, now’s the time to use an online rating comparison tool. Be sure to provide your current policy information for prior insurance discounts and then you can skim through the instant quotes to see which policy is the most affordable. Start comparing car insurance rates now by using our FREE tool below!