Just like employers are now banned from using Credit Scores to filter job applicants, we believe Insurance companies should be banned from using FICO scores to price insurance.
Sometimes we take California for granted and this was one of those cases where living here helps us as consumers since Insurance companies are not allowed to jack our rates because of poor credit. Hawaii, or Massachusetts, states have also banned insurers from using credit data to price premiums and determine rates. It goes without saying that our credit score plays a role in how much we pay for car insurance. The most recent study to prove the link between credit score and auto insurance rates was conducted by WalletHub. This post highlight the results of the full study and explains how best to proceed.
The relationship between credit and car coverage can’t be avoided, unless you relocate to an aforementioned state.
Why do insurance carriers look at my credit score?
Studies, like the ones outlined in the FTC’s report to Congress, have shown for decades that credit score is a good predictor of risk. An individual with more risk is likelier to file numerous or costly claims with the insurance company, and is therefore more expensive for a company to insure.
Underlying this cost analysis is research showing that people who take risks are likely to do so across the board. For example, behavior that can lead to bad credit (like paying credit card bills late) correlates with riskier driving.
In layman’s terms: if you haven’t proven that you’re financially responsible, insurers assume that you’re not a responsible driver, and will charge more to insure you.
How much does my credit score affect my premium?
Determining how much your credit score affects your premium is less straightforward. The extent to which your car insurance rate is impacted by your credit score depends on a few factors, including:
Your state. Based on the WalletHub study, the average state’s car insurance rates fluctuate by 64% when the applicant has excellent credit versus no credit history. In some states, credit data has a stronger impact on auto insurance premiums. District Columbia comes in first with 126% fluctuation. Vermont has the lowest fluctuation at 18%.
Your insurance carrier. Some insurance companies rely more heavily on credit score when pricing premiums. Premium quotes from Allstate fluctuated the most in WalletHub’s study (116%), while State Farm’s fluctuated the least (45%).
How do I know if my insurer is using my credit score to calculate my rate?
Unless you live in a state where the practice is prohibited, chances are good that your insurance carrier takes your credit history into consideration. All 15 of the largest auto insurers use credit scores in their assessments.
WalletHub’s study looked at how transparently companies disclose their sources of credit information and provide information about credit history usage to customers. Again, results varied by carrier.
Practically speaking, you may have to read the fine print or search through your insurer’s website to find specific info about where your insurer retrieves credit info and how they use it in pricing your insurance.
What should I do if I have bad (or no) credit?
In the short term:
If your insurer relies heavily on credit information, you may want to get some quotes from companies who don’t use credit score as prominently when pricing your premium. If the savings is significant, consider switching. You can get free quotes at EverQuote.com.