Low Cost Advisor

Inside The Use Of Credit By Auto Insurance Companies – Low Cost Advisor


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Car insurance companies use several factors to come up with your rates, such as your driving history, the type of car you drive and where you live. Many car insurance companies also use your credit to calculate your rates. The practice is controversial and banned in California, Hawaii, Massachusetts and Michigan.

But drivers with poor credit can be hit especially hard with higher prices. Low Cost Advisor’s analysis of car insurance rates in the 46 states that allow credit as a pricing factor found an average increase of 76% for drivers with poor credit. That amounts to nearly $1,180 more per year for drivers with poor credit compared to drivers with good credit.


How Your Credit-Based Insurance Score Is Calculated

Car insurance companies often use what is called a “credit-based insurance score” in setting rates. These are different from the typical credit scores such as your FICO score. Credit-based insurance scores put different weights on factors compared to other scores. It’s not possible to define a “good” insurance score because of the variety of ways it might be calculated.

Credit-based insurance scores generally aren’t available for consumers to see.

Insurance companies often cite a Federal Trade Commission study that draws a correlation between credit and the chances that a driver will file a car insurance claim. Insurance companies argue that the better your “credit-based insurance score,” the lower the chances that you will file a claim, which usually means you’ll get better car insurance rates for having good credit.

Credit-Based Insurance Score vs. Credit Score

Here’s the difference between the weights of factors used in regular FICO score vs. a FICO credit-based insurance score:

FICO notes that its score does not include factors such as age, gender, marital status, address and occupation. However, insurers often use these factors in setting their rates, where it’s allowed by law.

Will Credit-Based Insurance Scores Cost You?

The use of credit-based insurance scores won’t necessarily mean more money out of your wallet. Some states have done studies to examine the impact of using credit to determine insurance rates and found most drivers pay less for car insurance when credit is used as a pricing factor.

For example, about 66% of policyholders had lower car insurance rates with credit scoring in pricing, according to a 2016 study done by the Vermont Department of Financial Regulation. Conversely, 16% of policyholders had higher rates and 18% saw no difference.

The Vermont study found that about two-thirds of drivers would see their premiums increased if credit-based insurance scores were banned in the state because the insurers would distribute the “risk” among all drivers in the state. The increase would be about $33 a year per vehicle.

A similar 2017 study by the Arkansas insurance department found that about 57% of policyholders saw a decrease in their car insurance premiums. About 23% of policyholders saw an increase in premiums and 19% saw no change.

But some states disagree that use of a credit-based insurance score is a good practice. California, Hawaii, Massachusetts and Michigan have all banned the use of credit-based insurance scores for setting car insurance rates. There have been discussions in other states to ban the practice.

For example, Oregon currently has some restrictions on credit-based insurance scores for car insurance. Insurers cannot use credit to raise premiums at policy renewal, or cancel or refuse to renew a policy because of credit history problems. Senate bill 173 has recently been proposed in Oregon which would prohibit the use of credit to help determine rates.

What If My Credit Affected My Car Insurance Rates?

If your credit has had a negative impact on your car insurance, such as higher rates, policy cancellation or non-renewal, you can ask your insurer to provide you with the name of the credit bureau that supplied the information. If you believe the information is inaccurate, you can get it corrected.

The three national credit reporting agencies are:

You can get a free annual credit report from the three major credit reporting bureaus at AnnualCreditReport.com.

You can also take steps to improve your credit score, such as:

  • Make credit card and loan payments on time
  • Keep your credit utilization below 30%
  • Get a credit card if you don’t have one, but keep spending low

If you are able to improve your credit, call your auto insurance company before your policy renews and ask if they can re-run your credit and adjust your rates accordingly. While insurers typically check your driving record at renewal time, they may not be checking your credit regularly.

How Can I Lower My Car Insurance Rates If I Have Poor Credit?

While poor credit is likely to negatively impact your car insurance rates in states where the practice is allowed, you do have some options. Here are some ways you can get cheaper car insurance:

  • Comparison shop. Comparing rates is one of the best ways you can save on car insurance. Not all insurers price their policies the same, so if you have poor credit, compare car insurance quotes from multiple insurers.
  • Ask for discounts. Call your insurance agent and ask for a review of potential car insurance discounts. There are various ways to save, which vary by company.
    Get rewarded for being a good driver. Some insurers offer usage-based car insurance programs, which monitor your driving behaviors and calculate a score. If you score well, you could get a discount.
  • Drive less, pay less. If you are a low-mileage driver, you could consider pay-per-mile car insurance to lower your monthly costs.
  • Review your insurance policy. Your car insurance needs may have changed since you first bought your policy. It’s worth checking your policy to see if you are paying for any coverage types you no longer need. For example, if you are driving an older car you may want to drop collision and comprehensive insurance.

Car Insurance Rate Increases Due to Poor Credit

As you’ll see below, rate increases for poor credit can vary widely by company, which is why it’s so important to compare car insurance quotes.

What Other Costs Factors Are Used to Determine Car Insurance Rates?

Insurers rely on a variety of factors that affect your car insurance rates, such as:

  • Your driving history
  • The type of car you drive
  • Where you live
  • Other drivers in your household
  • Your insurance claims history
  • Your coverage selections
  • Your deductible amount
  • Home ownership
  • Marital status
  • Gender
  • Occupation
  • Education

The Road Ahead for Credit-Based Insurance Scores

The insurance industry’s use of credit-based insurance scores will remain a controversial topic, but it appears there is some momentum to take a more critical look at the practice.

For example, the National Association of Insurance Commissioners (NAIC) has pledged to address racism and discrimination in the insurance industry. The NAIC has formed a special committee, and one of its tasks is to determine whether non-driving factors such as the use of credit in determining insurance rates potentially disadvantages minorities.

Members of Congress have also weighed in on this issue. In 2020, U.S. Sen. Cory Booker (D-NJ) introduced the Prohibit Auto Insurance Discrimination (PAID) Act. The bill sought to eliminate discriminatory non-driving factors such as credit-based insurance scores. The PAID Act would have specifically banned the use of:

  • Education
  • Occupation
  • Employment status
  • Home ownership status
  • Credit score and consumer credit reports
  • Gender
  • ZIP code or adjacent ZIP codes
  • Census tract
  • Marital status
  • Previous insurance company
  • Prior purchase of insurance from that insurer

The bill died in Congress. The provisions in the PAID Act could become law by being included in another bill or added to a larger bill (sometimes called omnibus bills).


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