How your ­credit score hikes your auto insurance rate

Tim Rinaldi
Wealth of Geeks

Auto insurance consumers with fair credit pay nearly 50-percent more than their friends with excellent credit. And those with poor credit see rates 115% higher than consumers with excellent credit; 44% more than those with fair credit.

The impact is staggering. For millions of low-income motorists in the United States, the cost of state-mandated auto insurance pushes their budget to the limit. A recent report from the Consumer Federation of America (CFA) indicates that the auto insurance industry’s custom of using credit information to determine premiums is behind the problem.

The CFA report details the dramatically higher rates paid by drivers with poor-to-fair credit, even when their driving record is pristine. These rates, often higher for an excellent driver with poor credit than for a more creditworthy driver with a history of drunk driving, disproportionately impact lower-income communities.

Except for California, Hawaii, and Massachusetts, it’s standard practice for American auto insurers to factor credit scores into insurance premiums.

“On average, a consumer with poor credit has to pay twice as much for auto insurance as a driver with excellent credit, even if everything else, including their driving safety history, are the same,” according to the report’s co-author, CFA Director of Insurance Douglas Heller.


Creditworthiness dominates auto insurance rates

The insurance industry began to factor credit scores into premium pricing during the 1990s. In the time since, the metric has swept the industry.

Research conducted by Consumer Reports in 2015 determined that your credit score could have more of an impact on your premium price than any other factor. The non-profit emphasized that in an overwhelming majority of states, the influence of poor credit on premiums turned out to be more significant than the impact of a drunk-driving conviction. The opposite was true in only five states beyond California, Hawaii, and Massachusetts at the time of the Consumer Reports investigation.

The recent CFA report highlights that someone with excellent credit and no driving infractions is charged an average annual premium of $470 nationwide. However, the same safe driver with a fair credit score would see their premium rise to $701. The disparity widens even further for those with poor credit, with the premium soaring to an average of $1,012. The report’s authors are keen to emphasize these costs fall unevenly on people of color, even going so far as to call it a form of “modern-day redlining.”

While not the subject of their recent research, previous work by the CFA has shown these issues are exacerbated by the auto insurance industry’s reliance on zip codes as a price determinant. This discrepancy tends to raise the cost of premiums in lower-income areas, with residents of adjacent but more affluent neighborhoods sometimes paying far less. According to the CFA, good drivers in lower-income zip codes pay $410 more annually for auto insurance than those in neighboring zip codes.


Credit scores vs. credit-based insurance scores

The insurance industry differentiates between credit scores and its preferred metric, credit-based insurance scores, but the CFA’s research indicates the two methods for assigning scores are nearly the same. The standard FICO credit score model puts slightly more emphasis on the mixture of a person’s credit lines, while the insurance industry marginally elevates previous credit performance. In some states where the former metric has been banned, such as Michigan, the insurance industry has attempted to smuggle in the practice with the latter.

This terminological issue matters because it has been repeatedly shown that credit scoring disfavors low-income earners, with lower scores correlating with lower salaries. If a household operates on smaller margins, unexpected expenses can easily tip the budget into the red. This means that when it comes to state-mandated auto insurance, those most in need of a break tend to receive the opposite; using credit scoring in insurance premiums amounts to a financial penalty for the poor.


Worst offenders in credit-based premiums

The cost of auto insurance for people with poor credit is similarly high across most of the country. However, the CFA research notes that when it comes to exorbitant costs for such drivers, several states stand out. These include Florida, with 143% higher than average premiums for those with poor credit) Minnesota (172%), and most disturbingly, Michigan (263%), which has passed relevant legislation that is being circumvented.

On the industry side, the report calls out a handful of companies with the worst deals for people with poor credit. The average surcharge levied on these drivers over their counterparts with excellent credit is highest with State Farm (224%), Auto Owners Group (181%), Travelers (157%), and Progressive (148%).

It’s worth pointing out that the required statistics for the CFA study were not freely available, and the organization instead had to turn to the data market to purchase the information.


Getting credit scores out of auto insurance

Recent years have seen small gains in the effort to ban credit scoring from auto insurance premiums. While temporary, both the Nevada and Washington state’s insurance commissioners promulgated regulations to prohibit the practice for a time in the wake of the pandemic; however, a Washington court later struck that state down.

Legislative attempts to solve the problem have gained traction in several states, including Washington, New Jersey, Maryland, and Oregon – only to fail later. One bill that did pass in Colorado ( SB 21-169 ) focuses broadly on discrimination in insurance pricing as well as algorithms and may implicitly cover credit scoring, according to consumer groups cited by the CFA. On the Federal level, the Prohibit Auto Insurance Discrimination Act is currently making its way through Congress.

Portions of the insurance industry are also beginning to turn away from credit-based premiums, with Allstate criticizing the practice in favor of basing rates on telematics – data collected by the car – though data privacy concerns remain unsolved. Other insurers, such as CURE, Loop, and Root Insurance, have also begun to move away from credit-score models.

The authors of the CFA report are adamant that the solution needs to come from the government, which they believe should be banning the use of credit information in premiums at the state level and overseeing compliance via state insurance departments.
Furthermore, they would like to see more broad anti-discriminatory legislation for insurance based on the Colorado model to prevent the emergence of workaround mechanisms by the industry.

“Your auto insurance premium should be based on your driving record, not your credit score,” says the report’s co-author, CFA Research and Advocacy Associate Michael DeLong. “You shouldn’t have to pay more in premiums because of a factor unrelated to your driving.”