So you get your car insurance renewal in the mail. You have been a safe driver, you qualify for various discounts because you have not had any accidents and you’ve been a loyal customer for years. But what happens? Instead of your car insurance rates going down, they have increased significantly. What gives? Often it’s your credit score.
Car insurance companies have utilized credit scores when setting insurance rates for years. The use of credit scores in determining underwriting has only grown in importance. One recent study found that people with poor credit paid 91% more on average for car insurance than individuals with excellent credit scores.
Car insurers like State Farm or Farm Bureau will explain there is a direct correlation between a person’s credit score and their likelihood of filing an insurance claim. However, the methodology behind this explanation has always been debatable.
What isn’t debatable is poor credit can make getting car insurance next to impossible for many motorist throughout Michigan and the country in general. But is this fair? Credit scores are devised using a host of different variables. For example, people who have no debt and don’t use credit cards tend to have a lower credit score than individuals with plastic in their wallets. Others with too many credit cards also get penalized, no matter if the bills are paid on time.
Where you live also makes big difference. Living a mile away from a person with the exact same qualifications and driving record can mean the difference in hundreds of dollars – simply because of your zip code. The Consumer Federation of America reported that for GEICO, a factory worker with just a high school diploma would pay 90% more for car insurance than an attorney with the same driving record.
Studies have also shown credit-scoring disproportionately disfavors minorities and the poor. The use of “redlining” has plagued drivers in urban areas of Michigan, including Detroit and Flint, for years. Three states – California, Massachusetts and Hawaii – currently ban insurance companies from considering credit scores when setting auto insurance rates.
Legislators in Michigan have recently tried to ban the practice of redlining motorist based on their home residence, but insurance backed politicians killed the proposals.
What’s perhaps even more disturbing is insurance companies are now analyzing all sorts of new available data to predict whether a specific individual is more likely to make a claim. For example, insurance companies look at your recreational activities and even your shopping habits when determining car insurance rates. Looking at credit scores is only the beginning.
Given this reality, what can we do? Well, first its best to try to increase your credit score. The fastest way to achieve this is to pay your bills on time, not borrow too much on an individual credit card every month, limit the numbers of credit cards and try to limit the types of credit you have in general (student loans, mortgages, auto loans, etc.)
I also encourage you to contact your local state representative and explain how using credit scores to determine auto insurance rates is not sound public policy. Credit scores are wrought with error and should not take precedence over a person’s driving record.