Most people know that when they are shopping around for car insurance, their rate will depend upon a number of factors. However, many people assume that these factors include things such as how many accidents the individual has been involved in, traffic citations, and the like. Most people would never guess that a car insurance company would use more personal factors ─ such as an individual’s credit score ─ to set a car insurance rate. But that’s exactly what countless car insurance companies across the nation do, and in all but three states, the practice is perfectly legal.
Understanding Your Credit Score: What Does It Have to Do with Car Insurance?
If it sounds unfair and illegal, the former is certainly true. Most people believe that they should be judged based on their driving record, not on their personal finances. But like it or not, an insurer has the right to cherry pick elements of a credit report to determine your car insurance rate.
Creditors and banks use a consumer’s credit score to determine how likely (or not) it is that the consumer will pay back debt. Car insurance companies do the same thing, only rather than making a guess about how likely the individual is to pay back debt, they make a guess about how likely the consumer is to file a claim. And even if you have never had an accident, a car insurance company may charge you more based on your credit history.
In fact, this is why an article in Consumer Affairs explains that your typical FICO credit score (the ones that banks and creditors use) is not the same thing as a car insurance credit score. The latter looks at some, but not all, factors related to your credit score in order to create a number that speaks to your ability to “manage your risk exposure.”
What Raises Your Rates More – An Accident or a Bad Credit Score?
Again, it seems crazy to think that having a credit score that is anything other than excellent would impact your car insurance rate. What is even more absurd is the fact that a lower credit score may actually affect your rate more than being involved in an accident would.
In fact, a special report published by Consumer Reports found that a single driver in Kansas who had a moving violation on his or her record would experience a car insurance rate increase of $122 per year. However, a single driver with a perfect driving record, but with a credit score that was considered just “good,” not excellent, would see his or her rate increase by a whopping $233 per year, on average.
When Did Car Insurance Companies Start Using Credit Scores?
The practice of using credit scores to determine car insurance rates is a relatively new one. The same article in Consumer Reports states that it wasn’t until the mid-1990s that insurers got the idea. By 2006, after developing and testing the theory that credit scores could be used to predict the likelihood that an individual would file a claim, almost every insurer in the country was charging people more money in premiums the lower credit score they had.
States with Prohibitions on Insurers Using Credit Scores
There are only three states in the nation that have passed laws prohibiting insurers from using credit scores to determine consumers’ rates, and unfortunately Colorado is not one of them. In every state but Hawaii, Massachusetts, and California, insurers are completely within their legal rights to view your credit score and then charge you more money if your score is not up to par.
A graphic by Consumer Reports shows that in Colorado, the baseline insurance rate for someone with excellent credit is $1,121 per year. And if a person with excellent credit has been convicted of a DWI ─ driving while impaired ─ charge, their rate only increases to a mere $1,632.
But if you have poor credit, or credit that is less than excellent, watch out. Consumers with good credit pay, on average, $1,356 per year, and those with poor credit may be charged an average of $2,773.
Essentially, car insurance companies are charging drivers for accidents they have never even had, and may never have, based on something as nuanced and irrelevant (to driving ability) as a credit score.
It’s Not Legal, But It’s Happening
Although you can sign a petition at the bottom of the Consumer Reports article cited above to urge your state’s insurance commissioner to do something about the practice, for now, insurers using your credit score to determine your rate is a practice that very well may affect you.
If you are in an accident and have poor credit, your car insurance policy may quickly become more than you can comfortably afford. Although you can request a credit score exception in a handful of states ─ which asks an insurer to not use your credit score if it was affected by a situation out of your control, such as a divorce ─ most state laws do not require the exception.
What You Can Do as a Consumer
There are a few things that you can do as a consumer to fight back against unfair pricing and hopefully reduce your rate. First, if you know that you have a good or poor credit score that may result in a higher rate, you can request the exception mentioned above. Further, you can also shop around ─ not all insurance companies offer the same rates.
Also make an effort to control your credit. If you have credit cards, pay them on time and in full each month. Be proactive about understanding your financial history ─ if a credit report reveals a mark against you that you think is wrong, do something.
Finally, practice safe driving techniques to reduce your risk for being in an accident. And if you are involved in an accident that is caused by someone else, contact the experienced Colorado car accident attorneys at The Sawaya Law Firm.