By Kayda Norman
If you can’t afford to pay all of your bills now, the last thing you need is overpriced auto insurance. But that’s exactly what can happen if your credit drops enough (and you live in a state where insurers may charge you more).
Drivers with bad credit pay on average 77% more than drivers with good credit in states where it is allowed – even with identical driving histories, according to NerdWallet Analysis. The practice is not permitted in California, Hawaii, Massachusetts, or Michigan.
Having bad credit can even raise rates more than a recent DUI, in some cases. Among six insurers available nationally, three of them – Progressive (PGR) – Get a report, State Farm (STFGX) – Get a report and USAA – higher rates for poor credit than for a DUI.
Credit Based Insurance Scores
About 95% of auto insurers use a credit-based insurance rating to determine the likelihood of you filing a claim, according to FICO (FICO) – Get a report, the company that introduced the specific insurance model.
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These scores are different from the type of credit score that lenders and banks look at when you apply for a loan or credit card. Both look at similar factors, such as your payment history and how much you owe, but rate them differently.
In a traditional credit scoring model, “good” credit includes scores from 690 to 719, but it is difficult to say what a “good” credit-based insurance score is because each insurer determines it. himself. Still, if you have a decent credit score, the insurance version is probably tied.
Why Credit History Affects Your Auto Insurance Rates
Having good credit probably means you’ll get cheaper rates. Why? Insurance companies say research shows consumers with good credit insurance scores are less likely to file expensive or frequent claims. For this reason, insurers charge them lower rates.
These scores are used in tandem with other factors such as age, gender, make and model of the car to calculate auto insurance rates in the 46 states where the practice is permitted.
Despite widespread use, many consumers are unaware that insurers use credit to set rates.
“People don’t understand that insurers see them as a walking risk profile,” says Amy Bach, executive director of United Policyholders, a non-profit organization that advocates for insurance consumers. “They look at them much more deeply than a regular supplier would,” adds Bach.
Is it right?
Consumer groups, including United Policyholders, say the practice of using credit to price insurance is discriminatory. Bach says this is particularly unfair to workers and the unemployed.
But the tide may be turning. Michigan’s ban on the practice went into effect last year and some insurers are choosing not to use credit to set rates. Drivers in Texas can get an auto insurance quote from Dillo with no credit as a factor; Root Insurance, which analyzes applicants’ driving habits through a smartphone before issuing policies, has pledged to remove credit scores from its pricing model by 2025.
In addition to the four states that already ban using credit to set auto insurance rates, other states, including Maryland, Oregon, and Utah, don’t allow insurers to use credit to deny. initial requests, cancel policies or increase rates based solely on credit history. Today, amid the Black Lives Matter movement and the likely impact of Covid-19 on Americans’ personal finances, concerns about discrimination and credit are being taken a closer look, Bach notes.
“There needs to be more protection for insurance consumers because the product is mandatory,” Bach says. “Even though credit scores have predictive value, as insurers say, our argument remains that it is not the only factor [and] it is inherently unfair to penalize people for something that is often beyond their control. “
Shop to save
Drivers with poor credit aren’t necessarily doomed to pay higher rates than someone with a DUI, according to NerdWallet analysis. In Louisiana, drivers with poor credit pay about 24% less per year on average than drivers with a DUI.
Wisconsin insurers are generally not so lenient on credit history. In Badger State, drivers with poor credit pay on average almost 140% more per year than they would if they had a recent DUI.
But whether you have bad credit, a DUI, or some other mark on your driving record, the experts agree on what you need to do to get a better rate.
“The only thing you can do is compare apples to apples and get quotes from different companies,” says Bach.
Barbara Richardson, Nevada’s Insurance Commissioner, agrees that it’s best to compare auto insurance rates to get a lower price.
“My general advice is to shop, and I know no one likes to do that,” says Richardson. “Look at your state’s website, the National Association of [Insurance] Commissioners website and talk to local insurance agents who can help you narrow down your choices. “
Other ways to get cheap auto insurance
Besides shopping, here are some other ways to get cheap auto insurance:
- Maintain a clean driving record.
- Ask about discounts.
- Consider dropping full and collision coverage if you have an older car.
- If you drive relatively little, consider paying per mile auto insurance.
- Work on your credit by paying your bills on time and paying off your credit cards.
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Kayda Norman writes for NerdWallet. Email: [email protected]