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Understanding the impact of your credit score on auto insurance in NY

Credit score image

A higher credit score decreases your car insurance rate, often significantly, with almost every insurance company and in most states. Getting a quote, however, does not affect your credit.

A car owner’s credit rating has a significant impact on auto insurance rates. Most insurance companies consider credit ratings as a factor.

Your credit rating, also known as a FICO Score, is determined based on five components, all connected to your borrowing history and present circumstances.

  • Repayment history: 35%
  • Outstanding debt: 30%
  • Duration of credit history: 15%
  • Variety of credit sources: 10%
  • Recent credit: 10%

Nonetheless, it is not as straightforward as a specific score correlating to a particular rate. Insurance companies analyze your complete credit report and process it through an algorithm to determine an “insurance score.”

A credit-based insurance score doesn’t assess your creditworthiness, but instead evaluates your riskiness from an auto insurance standpoint, based on your financial reliability.

The extent to which your score influences your premium may differ across states. Five states — California, Hawaii, Massachusetts, Michigan, and Washington — prohibit the utilization of any credit report as a factor in setting insurance rates. Instead, these states choose to base rates on driving history, location, and other traits.

Drivers can also face penalties for insufficient credit history, which is often considered equivalent to having a poor credit history from an insurer’s perspective. Some states, including New Jersey and Rhode Island, forbid insurers from penalizing drivers for a lack of credit history, meaning drivers may be better off with no credit history rather than a poor one.


Worst states for drivers with bad credit

Bad credit increases rates the most for drivers in Arizona, with an average increase of 175%. Arizona is among six states, along with Texas, New Hampshire, New Jersey, Minnesota, and New York, where poor credit more than doubles your rates.


Do insurance companies examine your credit?

When obtaining auto insurance, your credit will be scrutinized in nearly every situation. According to a report from the Federal Trade Commission, every major auto insurer relies on drivers’ credit history to some extent.

A handful of states, such as California, Hawaii, Massachusetts, Washington, and Michigan, prohibit insurance companies from utilizing credit information to determine car insurance premiums.

Insurers check your credit because research has demonstrated that credit scores tend to be a reliable indicator of how many claims a driver will submit. This enables insurance companies to align higher rates with drivers who are more likely to utilize their insurance coverage. The rationale behind this practice is that a person’s financial responsibility often correlates with their driving habits and overall riskiness as a policyholder. As a result, insurers use credit scores as a proxy for predicting potential claims and adjusting premiums accordingly.

It is essential to understand that while credit checks are standard practice in the auto insurance industry, they are not the sole factor influencing your rates. Insurers also consider factors such as your driving history, location, vehicle type, and age, among others, when determining your premium. Additionally, some states have implemented regulations to prevent insurers from penalizing drivers for a lack of credit history or over-relying on credit scores in their rate calculations.

In conclusion, while insurance companies do typically check your credit when you apply for auto insurance, it is just one of many factors they use to determine your rates. Furthermore, the impact of your credit score on your insurance premium may vary depending on the state you live in and the specific insurer you choose.

admin Brian Aronov - Aug 3, 2022

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