As most motorists already know, auto insurance premiums are based largely on their driving records, along with personal data including age, gender, marital status and address, and the claims history (specifically physical damage and personal injuries) of the make and model being covered.
Thus, a single teenage male who drives a red-hot sports car and lives in a crowded and crime-ridden urban area — and has multiple moving violations and/or accidents on his record — can be expected to pay the highest rates overall.
However, there’s another lesser-known qualifier insurance companies use to determine what a policyholder will pay for coverage, namely his or her credit rating. Specifically, motorists having low credit scores are charged higher premiums than those having pristine credit histories.
According to the Consumer Federation of America, 95 percent of auto insurers use credit scores in their pricing of insurance policies. Not surprisingly, a CFA survey indicated that U.S. drivers reject insurer use of credit scores in their pricing of auto insurance policies by a greater than two-to-one margin.
The most common source of credit scores is FICO (It stands for Fair Issac Corp., the system’s creator and curator), and they’re based on a person’s payment history, outstanding credit balances and other factors. A ‘poor” credit risk represents a FICO score of 580 or less, with a “fair” score being between 580 and 669. The national average FICO score is 695, which is considered “good,” with a rating of 800 or more being “exceptional.”
How much more those having below-average FICO scores will pay for car insurance varies from one state to another. According to a study conducted by the personal finance website NerdWallet.com in San Francisco, auto owners in Michigan with poor credit pay $1,969 more each year for coverage than similar policyholders having the highest FICO scores. The next-steepest surcharges are assessed to those living in Louisiana ($1,354), Delaware ($1,344) the District of Columbia ($1,340), New Jersey ($1,204), Connecticut ($1,060) and Minnesota ($1,039).
Meanwhile, residents of California, Hawaii and Massachusetts escape such markups because those states prohibit carriers from using a driver’s credit rating to determine car insurance premiums. (Log onto www.nerdwallet.com for a list of bad-credit penalties for average drivers in all 50 states.)
NerdWallet says that in states that allow the practice, those having low FICO scores pay an average $690 more per year. By comparison, motorists who’ve caused a crash, which might be considered a more serious infraction when it comes to car insurance rates, are charged an average of $446 more than policyholders having clean driving records. What gives?
The official reason, according to provider State Farm in Bloomington, Ill., is that, “Studies show a connection between credit characteristics and insurance claims.” Specifically, the Insurance Information Institute, a New York City trade group, says, “The reasons behind the predictive value of credit scores appear to be behavioral. The character trait that leads to careful money management seems to show up in other daily situations in which people have to make decisions about how to act, such as driving.”
By that yardstick a provider assumes that someone having a higher credit score is more responsible and is less likely to drive recklessly and get in an accident, or that a motorist that’s deep in unpaid bills might be unduly stressed and become distracted or inattentive behind the wheel. And yet there are individuals out there who have gone through bankruptcy but otherwise maintain a flawless driving record, so go figure.