How Does Your Credit Score Affect Your Car Insurance?

Why do car insurance companies use credit scores 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.

How does your credit score affect your car insurance rates?

A credit score is a three-digit number that reflects a person’s creditworthiness and is used to predict the chance that they'll pay their debts on time. Credit scores are calculated based on information in a person's credit reports, which are collected 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 don't 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's 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'd rather drag their feet and not make a change that benefits all drivers. They'd 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've relied on for decades for measuring risk (and for making the most money at the expense of their customers).

Credit Scores Don't Paint A Complete Picture

Mike Kreidler is a former US Congressman, Army Reserve veteran, and currently a six-term insurance commissioner in the state of Washington. He’s responsible for making sure that consumers aren’t being ripped off by their insurers, and he’s good at his job. In 2020 he won the National Association of Insurance Commissioner’s “Excellence in Consumer Advocacy Award".

Kreidler has been opposed to using credit in pricing insurance for a long time. In July of 2020, he wrote an open letter to industry executives, asking for their support. He stated:

“My reasoning is straightforward: The use of credit scoring is unfair and has a disproportionate economic impact on low-income individuals and communities of color here and throughout the rest of our nation".

Recently, Kreidler issued an emergency order to restrict insurers from using a drivers credit to price their auto, renters, and homeowners insurance. In response, one of the larger insurance industry trade groups sued to stop him (back in 2021).

Insurers argue that using credit is in the consumer’s best interest, but there's almost no transparency or resources to help consumers judge for themselves.

With the belief that consumers deserve to be treated fairly and be informed, we set out to show you the numbers—how you’re actually being affected. We started our research by looking at a public records database for information about Progressive, Root, Mercury, and Noblr, all insurers that actively use credit to quote drivers.

HOW MUCH AM I BEING PENALIZED IF MY CREDIT GETS WORSE?  

This was a very difficult question to answer. While all four companies we researched used credit in some way, three out of four mask how they do it in either confidential parts of thier filings or by purchasing a proprietary insurance-credit-rating score that translates a Fair Isaac Corporation (FICO) score into a non-obvious “insight score” or “credit tier".

In short, it's clear that many insurers use credit, but nearly impossible as a private consumer to know how much they charge for it.

IT'S ALL IN THE NUMBERS

If we look at the entire car insurance industry, when comparing credit scores as a rating factor to other factors, credit scores are three times as costly as costly as DUIs, reckless driving, or at-fault accidents—in your car insurance pricing.

Source: https://www.thezebra.com/auto-insurance/texas-car-insurance/austin-tx-car-insurance/

With Root Insurance as a specific example, if we were a customer (most definitely a hypothetical) with a credit score of 700, we’d end up paying $272 more per year, than someone with perfect credit. And a large portion of citizens in the South don’t have a 700 credit score. So the price differences are even worse.

If our credit scores deteriorated like most other Americans during the pandemic, their bill could go up at renewal. For a credit score of 600, we’d pay $498 more per year, than someone who survived the pandemic with perfect credit.

Why do most insurers still use credit scores if it is unfair?

Spending an extra $42 more per month because of a low credit score has a meaningful impact on a family’s budget. But for the $1.3 Trillion property and casualty insurance industry, charging an extra $42 isn't even a concern.

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 like Mike Kreidler 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'd rather drag their feet and not make a change that benefits all drivers. They'd 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've relied on for decades for measuring risk.

For these reasons perhaps, Root (for being transparent as they are about the use of credit) estimates that it'll take them 5 years to remove credit from the way they price (we’ve already done that).

To sum it up, the debate about whether consumers benefit from credit is hard to measure, but certainly, people with lower credit scores are punished a lot.

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. When trying to figure out what to look for when shopping around for car insurance, keep these things in mind.

Some insurers have chosen to not use credit scores at all in their underwriting practices, focusing instead on other factors such as driving history, where a driver drives, vehicle type, and your current driving habits.

This 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 don't accurately predict a driver’s risk as a policyholder and disproportionately affect 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 drive and where they drive to more accurately measure their risk exposure and strive to make the results fairer (and more transparent) for everyone.

See how much you save when we take systemic bias out of the equation.