Car insurance companies today routinely pull your credit report and use your credit score and history as one factor in setting premiums. As we’ve discussed in the past, your credit history affects your finances in many ways. Car insurance premiums are a good example of this. The higher your score, the lower your premiums.
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Here’s how Progressive explains the use of credit scores in its underwriting process:
“Credit has been proven to be a very powerful and independent predictor of future accidents or insurance claims. The use of credit history provides an additional predictive factor — one not offered by other factors such as driving record, vehicle type, age, etc. In fact, Progressive data shows that consumers with the worst insurance scores are twice as likely to have an accident or insurance claim as those with the best scores.”
In short, having really bad credit can definitely make your insurance premiums go up. And having great credit history can help those premiums go down. But your driving record will still have a bigger effect on your premiums than your credit score. So a terrible driver with a great credit score is still going to pay a lot for car insurance.
Get Your Car Insurance Quote Based on your Credit Score
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It’s Not Your Actual Credit Score
Before we get further into this question, it’s important to note that car insurance companies aren’t looking at your real credit score. They don’t so much care about your numerical FICO or VantageScore.
Instead, they’re using your credit report information to create what’s called a credit-based insurance score. It looks at much of the same information. A history of late payments and a high amount of debt correlate with more auto insurance claims. However, your credit-based insurance score is likely weighted a bit differently than your FICO score. And you typically won’t see the numerical score an insurance company uses to determine your rates.
But Does it Affect Your Score?
But the question still remains. If car insurers pull your credit report during the application process, does that actually affect your credit? After all, credit inquiries can ding your credit score. But the credit report a car insurer pulls won’t actually affect your score, generally.
Why? It’s because insurance companies do what’s called a “soft pull” on your credit. There are two types of credit inquires, called a “soft pull” and a “hard pull:”
- A soft pull, also known as an involuntary inquiry, occurs when creditors want to send you pre-approved offers. That credit card solicitation you received in the mail was probably the result of a soft pull on your credit. Potential employers may check your credit as do your existing credit card accounts. Both of these are soft pulls. And if you check your own credit score, that’s considered a soft pull, too. The key is that a soft pull happens when you aren’t actively seeking out credit. So it has no effect on your credit score.
- A hard pull, also known as a voluntary inquiry, occurs anytime you actively seek credit and fill out an application. The lender will run your credit report and determine whether to approve your credit application and under what terms. A hard pull on your credit report indicates that you’re shopping for credit. So that will affect your credit score.
A car insurance carrier’s pull on your credit score seems, at first glance, to be somewhere in between. It is a voluntary inquiry, since you’ve actually applied for car insurance. But it’s not an indication that you’re seeking credit. For this reason, it usually comes as a soft pull that doesn’t affect your credit.
Here’s what other major insurers disclosure about pulling credit reports:
Geico explicitly states that it does pull credit reports where permitted by law. They confirm, however, that it does not affect an applicant’s credit score. They also describe your rights if your credit adversely affects your insurance premiums:
“If GEICO has taken an adverse action against you (such as offering you a higher rate) as the result of information contained in your credit report, you may obtain a free copy of your credit report. If you believe there are errors in the report, you should notify the consumer reporting agency immediately.”
State Farm says:
“Studies show a connection between credit characteristics and insurance claims, so many insurance companies use “Credit-Based Insurance Scores” to help determine rates (not applicable where prohibited by law).”
If you spend any time on forums about credit, however, you’ll hear about individuals who say a car insurance company performed a hard pull on their credit. While one can’t rule this out, it seems unlikely to me.
What is more likely is that the individual sees the soft pull on their credit and assumes that it’s a hard inquiry because it’s visible to them on their credit report. Nevertheless, if you believe that an insurance quote resulted in a hard inquiry, leave a comment below sharing your experience with us.