It doesn’t always matter that you’re a safe driver — having a bad credit score can significantly increase how much you pay for car insurance.
The nonprofit group Consumer Federation of America (CFA) recently analyzed how auto insurance companies use drivers’ credit scores when determining their annual premiums. Except for in the few states that ban car insurers from using credit data, the CFA found that insurers tend to charge safe drivers with fair or bad credit scores significantly more than those with good credit scores.
“Across the country, consumers with poor credit annually pay hundreds or even thousands of dollars more for the basic auto insurance coverage mandated by state laws,” the researchers wrote.
For decades, auto insurance companies have been using drivers’ credit histories, which show their debts and other information pertinent to insurers, to set how much they pay each year in premiums, tapping it as a proxy for how risky a driver they might be. Only three states — California, Hawaii and Massachusetts — currently ban the practice. Lawmakers in Illinois recently introduced the Motor Vehicle Insurance Fairness Act to ban it, as well.
(For reference, credit-scoring firm FICO considers a score between 800 and 850 to be exceptional; 740 to 799 is very good; 670 to 739 is good; 580 to 669 is fair; and anything below 580 is poor. The national average is 714. Keep in mind credit-based insurance scores and algorithms — which car insurers use to set premiums — use much the same credit information but tend to produce slightly different numbers than a standard credit score like FICO.)
Given that auto insurance is mandatory in 49 states and that Americans' credit history often correlates to race and income, the CFA found that the steep penalties faced by drivers with poor credit disproportionately harm low-income earners and people of color across the country.
However, Jeff Dunsavage, a senior research analyst at the nonprofit Insurance Information Institute, argues that credit scores strongly correlate to the risk of crashing and that giving different policy holders different premiums is simply the nature of the business.
“Charging higher premiums to higher-risk policyholders helps insurers underwrite a wider range of coverages, improving both availability and affordability of insurance,” he wrote in an analysis of the Illinois proposal earlier this year.
Where people with bad credit pay the most for car insurance
According to the CFA, most drivers believe that their driving record and behavior are the core factors that determine how much they pay for auto insurance. However, research suggests that’s not necessarily the case.
In Michigan, for example, the CFA found that a safe driver with a poor credit score pays, on average, 263% more for auto insurance than a similar driver with excellent credit — a difference amounting to more than $1,900 per year. Michigan was also the most expensive state in general for safe drivers with poor credit.
Here’s where auto insurance companies typically charge the most to drivers with bad credit:
- Michigan: $2,667 a year (Drivers with excellent credit pay an average of $734.)
- New York: $2,097 (Drivers with excellent credit pay $730.)
- Florida: $2,000 (Drivers with excellent credit pay $822.)
- Delaware: $1,695 (Drivers with excellent credit pay $773.)
- New Jersey: $1,663 (Drivers with excellent credit pay $660.)
- Rhode Island: $1,580 (Drivers with excellent credit pay $789.)
- Minnesota: $1,522 (Drivers with excellent credit pay $560.)
- Louisiana: $1,505 (Drivers with excellent credit pay $713.)
- Kentucky: $1,451 (Drivers with excellent credit pay $555.)
- Maryland: $1,422 (Drivers with excellent credit pay $805.)
Nationally, the CFA says that the average auto insurance premium for safe drivers with poor credit is $1,012, while the premium for a safe driver with excellent credit is only $470.
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