How Does Your Credit Score Affect Your Car Insurance?
Why do car insurance companies use credit score when pricing customers?
Car insurance companies have been using your credit score to price drivers like you for decades, despite criticism from other drivers and industry leaders alike.
Other insurers say that using your credit score is in your best interest. We think they’re trying to hide their bias against minorities and underserved communities.
What is a credit score and how does it affect your car insurance premium?
A credit score is a three-digit number that reflects an individual's creditworthiness and is used to predict the likelihood that they will pay their debts on time. Credit scores are calculated based on information in a person's credit reports, which are compiled by credit bureaus based on credit accounts and payment history.
And here's the important part—these scores have nothing to do with how you drive.
Car insurance companies use credit scores as a factor in determining premiums because they believe that there is a correlation between a person's credit score and their likelihood of filing a claim. Traditional car insurance companies believe that if you have a bad credit score, you’re more likely to file a claim while having a policy (which makes no sense if you think about it).
Credit scores do not always accurately predict a driver’s risk as a policyholder. For example, a person with a low credit score may be a responsible driver with a clean driving record, while a person with a high credit score may have multiple accidents or traffic violations.
The use of credit scores disproportionately affects people on the lower ends of our economy, who are more likely to have lower credit scores due to systemic biases and financial hardships. Mike Kreidler, a six-term insurance commissioner in Washington state, has been a vocal critic of the use of credit scores in insurance pricing, calling it "unfair and has a disproportionate economic impact on low-income individuals and communities of color".
There is also little transparency in exactly how car insurance companies use credit scores to price premiums, making it difficult for drivers to understand how their credit score is affecting their policies.
Why do most insurers still use credit scores if it is unfair?
Despite the obvious issues surrounding the use of credit scores in insurance pricing, most car insurance companies continue to use them because of the use of traditional rating systems and the costs associated with changing their underwriting practices.
If regulators or industry leaders were to successfully push for a ban on the use of credit scores in insurance pricing, big insurers would have to find alternative methods for assessing risk and setting premiums. This process would likely involve big changes to their underwriting practices, training, and systems, which would be costly and time-consuming for insurers.
So they would rather drag their feet and not make a change that benefits all drivers. They would rather focus on their bottom-line and maintaining old practices than actually changing an unjust and broken industry. Many insurers may never want to abandon a practice that they have relied on for decades for measuring risk.
It's all in the numbers
When comparing credit score as a rating factor to other factors, credit score is three times as costly as costly as DUIs, reckless driving, or at-fault accidents—in your car insurance pricing.
Alternatives to using credit scores in insurance pricing
There are several alternatives to using credit scores in insurance pricing that may be more fair and accurate in predicting risk. One alternative is the use of "telematics" or "pay-as-you-drive" (PAYD) insurance, which uses technology such as onboard sensors, mobile apps, and GPS to track a driver's behavior and set premiums based on your actual driving habits.
This approach focuses on the driver's actual driving behavior and where they drive, rather than their credit score—which may be more accurate in predicting their likelihood of filing a claim.
Some insurers have chosen to not use credit scores at all in their underwriting practices (like LOOP), focusing instead on other factors such as driving history, where a driver drives, vehicle type, and current driving habits.
This is unfair practice is just one example of why LOOP was created
The use of credit scores in insurance pricing is clearly an issue that has to be fixed. These scores do not accurately predict a driver’s risk as a policyholder and disproportionately affects low-income individuals and communities of color.
Credit scores have nothing to do with whether or not someone has good driving habits.
At LOOP, we believe that all people are worthy of fair rates and we have taken a stand to never use credit in our underwriting practices. Instead, we look at how drivers dirve and where they drive to more accurately measure their risk exposure and strive to make the results fairer (and more transperent) for everyone.
See how much you save when we take systemic bias out of the equation.