The Secret Score Behind Your Insurance Rates
What insurance companies don’t want you to know!
You’ve heard of the FICO credit score? But I certain your haven heard of the version insurers use to figure how much they can charge you for a policy—a score they have no legal obligation to show you.
How your credit score raises your premium
Your credit score is used to measure your creditworthiness, meaning the likelihood that you’ll pay back a loan or credit-card debt. What you might not know that car insurers are also rummaging through your credit files to do something completely different. They are using the information to predict the odds that you’ll file a claim and if they think that your credit isn’t up to their highest standard, they will charge you more, even if you have never had an accident.
Selecting about thirty of almost one hundred and thirty elements on a credit report, each insurer creates a proprietary score that’s very different from the FICO score you might be familiar with, so that one can’t be used to guess the other reliably.
The increase in your premium can be significant. Our single drivers who had merely good scores paid $68 to $526 more per year, on average, than similar drivers with the best scores, depending on the state they called home.
And your credit score could have more of an impact on your premium price than any other factor. For our single drivers in Kansas, for instance, one moving violation would increase their premium by $122 per year, on average. But a score that was considered just good would boost it by $233, even if they had a flawless driving record. A poor credit score could add $1,301 to their premium, on average.
Consumers are being kept in the dark
Because insurance companies are under no obligation to tell you what score they have generated for you, you have no idea whether it is bad or good.
Car insurers didn’t use credit scores until the mid-1990s. That’s when several of them, working with the company that created the FICO score, started testing the theory that the scores might help to predict claim losses. They kept what they were doing quiet from consumers. By 2006, almost every insurer was using credit scores to set prices. But two-thirds of consumers surveyed by the Government Accountability Office at about the same time said they had no idea that their credit could affect what they paid for insurance. Today, insurers don’t advertise that they even use your credit to generate your premium rate. They usually won’t tell you what your score is because they don’t have to. If a sudden drop in your score causes them to raise your rates or cancel your policy, you’ll receive a so-called adverse action notice. But those notices “provide only cryptic information that’s of limited use,” says Norma Garcia, senior attorney and manager of the financial services program at Consumers Union, the advocacy arm of Consumer Reports.
California, Hawaii, and Massachusetts are the only states that prohibit insurers from using credit scores to set prices. In those states, insurers base premiums largely on a consumer’s driving record, the number of miles driven per year, and other factors. According to a 50-state study of insurance regulations by the Consumer Federation of America in 2013, California’s pricing practices, passed as part of Proposition 103 in 1988, saving $8,625 per family during those 25 years.
Paying for accidents you didn’t have
You buy car insurance so that you’re protected financially in the event of an accident. But an unfair side effect of allowing credit scores to be used to set premium prices is that it effectively forces customers to dig deeper into their pockets to pay for accidents that haven’t happened and may never happen.
For example, our single New Yorkers with good credit scores and clean driving records would pay an average of $255 more in annual premiums than if they had excellent credit scores. In California, those same drivers wouldn’t have to pay a penalty for having only “good” credit.
In the states where insurance companies don’t use credit information, the price of car insurance is based mainly on how people actually drive and other factors, not some future risk that a credit score “predicts.”
That pricing dynamic also artificially reduces the true sting of careless driving in states like New York. If you have an accident, your premium takes less of a hit because you have already paid for the losses that your merely “good” score predicted you would have. In California, the $1,188 higher average premium our single drivers had to pay because of an accident they caused is a memorable warning to drive more carefully. But of course, the more carefully people drive, the safer the roads are for everyone. In New York, our singles received less of a slap, only $429, on average.
Four Ways to Fight Unfair Premium Pricing
- Monitor your credit reports to make sure they’re accurate, and ask to be rescored if you’ve found and corrected errors in your file. That’s important, because the information that determines your insurance credit score is plucked from them. Get your free yearly report from all three credit bureaus at annualcreditreport.com.
- Use credit that insurer scoring models favor: national bank-issued credit cards such as Amex, Discover, MasterCard, and Visa.
- Keep credit-card balances in check; the higher the balance, the more points you lose on your score
- Avoid certain types of credit that insurance company credit-scoring models penalize you for: department-store credit cards, instant credit offered by stores to move big-ticket items; credit accounts from your local tire dealer, auto-parts store, or service station; and finance-company credit, including retailer credit cards.