Credit scores and car insurance: if you don't succeed, try again

By Posted : 07/25/2012

laws pertaining to credit scoring and car insuranceThree congressmen recently proposed a bill that would eliminate credit scores from the list of factors used by car insurers to determine rates.

The bill, H.R. 6129, titled the Ban the Use of Credit Scores in Auto Insurance Act,  would amend the Fair Credit Reporting Act so that reports on consumer credit can't be used in the underwriting process. It was sponsored by Reps. Hansen Clarke (D-Mich.), John Conyers Jr. (D-Mich.) and Bennie Thompson (D-Miss.) and was referred to the U.S. House of Representatives Financial Services Committee

"The cost of insurance for everyday people is simply too high," Clarke said in a July 16 post on his Facebook page. "We have to end insurance rating factors that are unfair. Companies penalizing citizens for their credit score and other 'redlining' practices must end."

Michigan’s car insurance premiums rank as the country’s third most expensive, with 2012 models averaging $2,013 a year. Mississippi came in at No. 19 at $1,502, according to a Quadrant Information Services analysis of insurance rates.

Conyers, in a July 12 Facebook post, said, "Auto insurance rates should be based on your skills and responsibility behind the wheel, not extraneous factors outside your control."

Credit scoring as part of the underwriting process is controversial. Consumer groups believe that credit history has nothing to do with how safely you drive, punishes those with financial troubles and discriminates against minorities and low-income drivers.

Insurers contend that data show that there is a high correlation between credit history and the number and cost of claims filed –statistically, they say, people with poor credit file more claims. (See: "How does my credit history affect my home insurance and car insurance rates?")

The current status of credit scoring and car insurance

Three states -- California, Hawaii and Massachusetts -- prohibit the use of credit information in setting auto insurance rates.

Michigan several years ago banned credit scoring for personal insurance lines, but the Michigan Supreme Court in 2010 lifted the ban after insurance companies sued. However, there are still restrictions on what insurers can do with credit data.

Michigan state insurance scoring rules signed into law in early July say carriers can't use insurance scoring to levy a surcharge or to determine insurability, but can use the information to provide discounts to those with good credit. Additionally, insurers can use credit information and insurance scores to determine options and availability for premium installment payments.

Carriers also must provide policyholders and applicants explanations of which credit factors were used when the company takes any action based on their credit histories.

Credit history is just one of many factors insurers evaluate when setting car insurance rates. They also consider your driving record, age, where you live, your marital status and the model of car you drive as well as other variables.

Improving your credit history to get cheaper car insurance rates

No one is perfect. If you have a less-than-stellar credit report, there are steps you can take to polish your record. To improve your credit:

  • Get free copies of your credit reports through AnnualCreditReport.com, review them and follow instructions for correcting any factual errors.
  • Try to catch up on late payments to creditors and pay your bills on time.
  • Maintain credit card balances under 30 percent of credit limits.
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3 Responses to "Credit scores and car insurance: if you don't succeed, try again"
  1. Susan Decker 13, Sep, 2012

    I am a 55 year old disabled woman. I sold my van a year and half ago because my insurance premiums were just going too high for me to afford. In the last year and a half, I have realized that I couldn't keep needed dr appts when rides i arranged bailed out for some reason or another not to mention that I had to pay people to take me grocery shopping etc, i just had to get a car. I just bought an old 1993 jalopy just to get to dr appts, shopping and necesary places. I nearly had a heart attack when i saw the quotes. All but 1 were over $700 for 6 months for Michigans min. liability insurance required by law. Keep in mind that I have 0 tickets, 0 accidents and 0 claims for probably 20 years. My Rental history is EXCELLENT. My utility payment history is EXCELLENT. But I haven't had a loan in more than 20 years. I have NO credit cards. I save until i have enough to pay for what i want. Other than a few misc medical bills, there is nothing on my credit report. It's insane! It's highway robbery! And i've no choice. I picked the lowest quote and i have no idea how i'm going to afford it. I guess i'll just have to quit eating.

      Reply»  
  2. Tony 02, Aug, 2012

    My credit is poor but I have not have any crash or claim in my policy in more than 20 years. I am paying for those that have good credit but don't know how to drive and end up in a crash every now and then. Is not fair to pay high insurance if your driving record is clean of tickets or accidents. Even with discount still high.

      Reply»  
  3. allen cohen 02, Aug, 2012

    It should be illegal for insurance companies to use credit history. Millions of americans, such as myself, lost their jobs, due to outsourcing. How is that the fault of the worker ? The insurance companies are some of the most likely to outsource jobs. Then they raise the insurance rates on those workers whose jobs they sent away. How can that be allowed to remain legal ?

      Reply»  

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