How your credit score influences skyrocketing car insurance costs

[UNITED STATES] In recent years, car insurance costs have been surging across the United States, leaving many drivers struggling to keep up with rising premiums. While factors like inflation, increased accident rates, and higher repair costs contribute to this trend, there's another crucial element that many consumers overlook: their credit score. This article delves into the complex relationship between credit scores and car insurance rates, exploring why insurers use this information and how it impacts your wallet.

At first glance, your credit history might seem unrelated to your driving habits. However, insurance companies have long used credit-based insurance scores as a factor in determining premiums. These scores, while similar to traditional credit scores, are specifically designed to assess insurance risk.

Douglas Heller, Director of Insurance for the Consumer Federation of America (CFA), explains, "The vast majority of Americans do not realize when they go shopping for insurance that their credit history is likely to have as much or more of an impact as if they have a drunk driving conviction."

How Credit Scores Affect Insurance Premiums

The impact of credit scores on insurance rates is significant and measurable. According to recent data:

Drivers with excellent credit paid an average of $1,947 for auto insurance in 2023, which is $1,070 below the national average.

In contrast, those with poor credit faced an average annual cost of $4,145, a staggering $1,128 more than the national average.

This disparity means that drivers with poor credit often pay more than double what those with excellent credit pay for the same coverage.

The Insurance Industry's Perspective

Insurance companies argue that credit-based insurance scores are a reliable predictor of claim likelihood. John Espenschied, owner of Insurance Brokers Group, notes, "When you apply for car insurance, the company checks your credit rating. If your score is low or if there is an indication that you might be living beyond your means, it may affect whether you get coverage at all."

Insurers use various factors from your credit report to calculate these scores, including:

• Payment history
• Outstanding debt
• Length of credit history
• Types of credit used
• Recent credit applications

State-by-State Variations

The impact of credit scores on insurance rates varies significantly across states. In 27 states, drivers with poor credit pay at least double the premiums of those with excellent credit2. However, some states have taken action to limit this practice:

California, Hawaii, Massachusetts, and Michigan prohibit insurers from using credit history to set auto insurance rates.

Other states, like New Jersey and Rhode Island, don't allow companies to charge more for a lack of credit history.

The Consumer Perspective

Many consumer advocates argue that using credit scores in insurance pricing is unfair and discriminatory. Douglas Heller of the CFA states, "You could be the safest driver on the road and find yourself paying literally hundreds and even thousands of dollars more than somebody with the exact same driving record but excellent credit."

This practice can disproportionately affect low-income individuals and communities of color, who may have lower credit scores due to systemic economic disparities rather than their driving abilities.

Recent Trends in Insurance Costs

The impact of credit scores on insurance rates is particularly concerning given the recent surge in overall insurance costs. According to a Bankrate report:

U.S. drivers are now paying an average of $2,543 annually for car insurance, a 26% increase from the previous year.

This cost represents 3.41% of the median household income, placing a significant burden on many families.

Greg McBride, chief financial analyst for Bankrate, warns, "Auto insurance rates have been rising at a breakneck pace. And though the pace of increases will eventually slow, that doesn't mean premiums are coming down."

What Consumers Can Do

While the use of credit scores in insurance pricing remains controversial, there are steps consumers can take to potentially lower their premiums:

Improve Your Credit Score: Pay bills on time, reduce outstanding debt, and avoid opening new credit lines unnecessarily.

Shop Around: Different insurers weigh credit scores differently, so comparing quotes from multiple companies is crucial.

Work with an Independent Agent: Michael DeLong from the CFA suggests, "Some good agents may be very helpful and know about smaller companies or more specific policies for your situation."

Understand Your Credit-Based Insurance Score: While insurers don't disclose their exact scoring models, understanding the factors they consider can help you improve your standing.

Consider Usage-Based Insurance: Some insurers offer programs that base rates on your actual driving behavior rather than demographic factors.

The Future of Credit-Based Insurance Pricing

As awareness grows about the impact of credit scores on insurance rates, there's increasing pressure on both insurers and regulators to reevaluate this practice. Some states are considering following the lead of California, Hawaii, Massachusetts, and Michigan in limiting or banning the use of credit information in insurance pricing.

Robert Hunter, former Texas insurance commissioner, argues, "It's time for insurance companies to stop using credit scores and focus on factors that actually relate to driving, like your driving record and the number of miles you drive."

As car insurance costs continue to surge, understanding the role your credit score plays in determining your premiums is crucial. While the practice remains controversial, it's clear that maintaining a good credit score can lead to significant savings on your auto insurance. By staying informed, improving your credit, and shopping around for the best rates, you can navigate this complex landscape and potentially reduce your insurance costs.

Remember, your driving record and actual road behavior should be the primary factors in determining your insurance risk. As the debate over credit-based insurance scoring continues, consumers should remain vigilant and advocate for fair and transparent pricing practices in the auto insurance industry.