Your Insurance Credit Score Has No Effect on Your Real Credit Score
Finding the best deal on insurance can be tricky. That’s because your insurance rates can vary wildly, and every company determines premiums based on proprietary formulae. The benefit of all of this in theory is more competition, which leads to lower rates. The downside is that many people have misconceptions about how insurance rates are determined and how insurance and credit scores are related. Many people confuse their insurance credit score with their actual credit score.
The bottom line is simply this: shopping for better insurance rates will not lower your credit score. Carriers in most states routinely check prospective buyers’ credit histories, and it may be used to determine premium rates. A person with a low credit score will generally pay higher insurance premiums than someone with a good credit score.
Indeed, most insurance carriers check your credit except where it’s illegal. In California, Massachusetts, and Hawaii for auto insurance; and Maryland and Hawaii for home insurance, insurance companies cannot legally check your credit history. But in all other states, this practice is common, and perhaps this is the source of much confusion.
Does an Insurance Quote Affect Credit Score? In Short, No
To better clear up this common misconception, let’s examine two scenarios. In the first one, you’re looking for a better insurance policy for your car. In the second one, you’re looking to finance a new car.
In the first scenario, each insurance company you get a quote from will check your credit history. This record remains on your credit history for up to two years, but it does not change your credit score one way or another. Because searches of credit history stay on their credit record for so long, many people think these routine soft inquiries negatively affect their credit score.
But this is not even entirely true in the second scenario. Known as a hard inquiry, these credit history searches are more detailed because you are actually attempting to borrow money on credit. And typically, car dealers will shop around at many banks and other lenders, looking for the best terms. All of these credit inquiries also remain on your credit history for two years, but they typically do not affect your credit score by more than a couple points for a short time.
Your Credit Score and Insurance Rates Rarely Clash
Rest assured, credit checks by insurance carriers and other soft inquiries will not lower your credit score. Only hard inquiries will affect your score by a small amount and a limited time. Hard inquiries are requests for your credit worthiness by lending institutions, like banks, when you are trying to borrow money whether it’s a large amount (home loan) or little amounts as you need it (credit cards). People should have no reason to worry about getting a lower credit score simply because they are buying a new insurance policy.