Credit-Based Insurance Scores: How They Work and Where They're Restricted

In the majority of states, insurers may use a credit-based insurance score as one factor in pricing auto insurance. It's a controversial practice, regulated differently around the country, and worth understanding because it can move your rate more than a speeding ticket.

What it is

An insurance score is calculated from your credit report (payment history, outstanding debt, length of credit history, new credit, and credit mix) but weighted for its statistical correlation with claims rather than for lending risk. It's not the same as a FICO score, and you generally won't see it.

What it isn't

Insurers can't use income, race, ethnicity, religion, gender or marital status in the score, and pulling your report for an insurance quote is a soft inquiry that doesn't affect your credit score.

Where it's restricted

A few states prohibit using credit in auto insurance pricing altogether, and several others limit how much weight it can carry or bar its use as the sole reason for a rate increase or nonrenewal. Rules change; check your state insurance department's website.

What moves the score

The same habits that help credit: on-time payments, low balances relative to limits, few new accounts, and correcting errors on your report. Because the score weights factors differently, small changes can have an outsized effect over a year or two.

What to do

• Check your credit reports at annualcreditreport.com and dispute errors.
• If your credit has improved significantly, request new quotes; some insurers re-score only on request.
• If you've had a hardship (job loss, medical event, divorce) some states require insurers to consider a "extraordinary life circumstances" exception. Ask.

If your credit affected your quote

The federal Fair Credit Reporting Act gives you some tools here. If an insurer charges you more, or offers less favorable terms, based partly on information in your credit report, it generally has to tell you. That notice, often called an adverse action notice, should name the credit bureau it used and explain that you can request a free copy of your report from that bureau within a set period.

Use it. Request the report, then read it with a few things in mind:

• Accounts you don't recognize, which can signal errors or identity theft
• Late payments you believe were made on time
• Balances or credit limits reported incorrectly, since a missing limit can make usage look higher
• Old negative items that should have aged off

Dispute anything wrong directly with the bureau, and keep copies of what you send. Once a correction posts, ask the insurer to re-run your quote or re-rate your policy. Some will do it on request, while others wait until renewal. In some states, you can also ask the insurer to explain the main reasons your score affected the price.

Timing your quotes around credit changes

Because insurance scores shift as your credit changes, timing can matter.

Paying down revolving balances is one. Usage is typically measured from what your card issuers report each month, so wait until a statement or two reflects the lower balances before requesting new quotes.

Another is when a negative mark ages off your report. Most negative items, such as late payments and collections, generally drop off after seven years. If you know a date is coming up, note it and shop after it passes.

On the other side, avoid opening several new credit accounts right before you shop, and think twice about closing your oldest card, since both can change the factors insurance scores rely on.

Finally, ask your current insurer how often it re-checks credit. Some re-score at every renewal, others only when you ask. In states that ban credit-based pricing for auto insurance, none of this affects your rate, so focus on the factors that do count there.

A realistic example

Consider a hypothetical: Rosa had a rough stretch two years ago and carried high card balances for months. Her auto premium rose at renewal around then, and she received a notice saying information in her credit report played a part.

Since then, she has paid down most of the balances and made every payment on time. She pulls her reports from all three bureaus and finds a paid-off account still listed with a balance. She disputes it with the bureau, keeps a copy of her dispute and waits for the correction to post.

Once her next statement cycle shows the lower balances and the error is fixed, Rosa asks her insurer whether it will re-score her mid-term. It re-checks only at renewal, so she also requests quotes from a few other insurers with the same coverage levels. She compares totals and decides, knowing credit is just one of many factors behind each price.

Common questions

Why is my car insurance so high with a clean record and bad credit?

In most states, insurers can use a credit-based insurance score alongside your driving record, and it can carry real weight. A clean record helps, but it may not fully offset a low insurance score. Rates also depend on your vehicle, location and coverage choices. If your credit is improving, re-shop once the changes show up, and ask whether a telematics program is available as another way to show how you drive.

Do all car insurance companies use credit the same way?

No. Each insurer builds or licenses its own scoring model and decides how much weight to give it, within whatever limits your state sets. That's one reason two companies can quote the same driver very differently. Some lean on credit heavily and others less so. If credit is a weak spot for you, comparing several quotes improves your chances of finding one that weights it lightly.

Can I get car insurance without a credit check?

In states that prohibit credit-based pricing, insurers don't use credit for auto rates at all. Elsewhere, most insurers check as part of the quote, though it's a soft inquiry that won't affect your credit score. If you have little or no credit history, insurers may treat that differently from a poor history, and some states have rules about how they can do so. Ask how a thin file is handled.