The main reason that auto insurance companies use a person's credit history is to determine an "insurance" score which is used as a rating factor to help insurers determine what they will charge a motorist for a policy. Although, credit may be used as one of the factors to calculate premiums, there are many other items that can affect the price of automobile coverage.

How Auto Insurance Companies Use Credit Scores

Depending on the state, when a motorist applies for automobile coverage they will have their credit history checked by the insurer which is used to calculate "insurance or credit scores" which are then analyzed to determine the likelihood of a potential policyholder filing a claim; carriers believe that the financial history of motorists show a direct correlation with the chances of them being involved in accidents or claims and there are studies that show this to be true. A company will evaluate individuals that they have previously insured based on claim history along with their credit report and assign groups for drivers with similar characteristics.

When a person applies for auto insurance coverage they will be placed in a group based on their credit history; similar to the way insurers use driving records to assign risks. The riskier a person may be to insure the more likely they will have to pay more for their policy; the opposite applies as well. If a person has an excellent credit history they may receive a discount, whereas a poor credit report may result in a surcharge.

One should keep in mind that scores are used very differently than the way a lender uses them to predict the likelihood of a consumer repaying a loan. While lenders use the actual score provided by the credit bureaus, each insurer has a different method of determining an "insurance score" and scores can vary from each company. Each carrier will likely take following into consideration when determining scores:

  • Past delinquencies
  • Bankruptcies
  • Debt ratios (how close a consumer is using their credit limit)
  • New credit inquiries
  • Length of credit history
  • Types of credit

Particular states are very strict about the way that car insurance companies are allowed to use credit history and keep a close eye on how it is being used. In many states it is allowed to be used to calculate a policyholder's premium, but cannot be the sole reason for a denial, cancellation or non-renewal. In addition, most states require insurers to give a reason to the consumer if an adverse action is taken on their policy and provide an explanation. An adverse action includes denial or termination of coverage and rate increases.

Consumers should be aware of the way that insurers are allowed to use credit in their particular state if at all; it should also be noted that insurers do not need permission to access an applicant credit information. Each state has different guidelines which carriers must follow and some do not let insurers use credit as a rating factor at all. Individuals can contact their state insurance regulator for more information.