How Much Does Your Credit Score Affect Your Auto Insurance Rate?

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It’s a fact of life that car insurance companies take into account a wide range of factors in set your premium, some of which have nothing to do with the way you drive.

For example, in all but three states—California, Massachusetts, and Hawaii—insurance companies consider a policyholder’s credit score when determining what they pay for insurance.

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How much weight is given to your credit score if you live in one of the other 47 states or the District of Columbia? It depends on the company.

With that in mind, personal finance website finance WalletHub.com conducted an interesting study, looking for rates from major insurers for two hypothetical policyholders that were identical in every way except their credit scores. One had excellent credit, the other poor credit.

The mission

The research aimed to achieve three goals. First, it examined how transparent insurance companies are in disclosing their use of credit data in the decision-making process.

Next, it wanted to know how up-and-coming companies are about where they get their credit information on customers. Finally, it sought to measure the extent to which credit information makes a difference in what consumers pay.

For some companies it makes a big difference. WalletHub found its scenario generated rates of Farmer’s Insurance which were 62% apart. Geico appears to be the least dependent on credit scores, with a premium fluctuation of 32%.

When the scenario was changed to move the drivers from state to state, the difference in credit score also mattered. The research found that the biggest impact was in Michigan, where premiums ranged by 115%. Credit scores were least important in Connecticut, where there was only a 15% difference in rates.

Transparency

In terms of transparency, the study looked at how easy it is for a consumer to find out if the insurer has access to his or her credit information and uses it to provide pricing information.

The study scored Progressive insurance highest in transparency about both the use of credit data in generating quotes and the source of that credit data. Liberty Mutual the lowest score.

In the average state where insurance companies are allowed to use credit scores, the rate difference between a consumer with excellent credit and one with bad credit was 49%, the study found.

Insurance Credit Score

While this may be useful information for consumers seeking auto insurance, the National Association of Insurance Commissioners (NAIC) points out that a normal credit score and an insurance-based credit score are not the same.

NAIC says credit-based insurance scoring was introduced in the early 1990s and uses certain elements of a consumer’s credit history to predict how likely he or she is to have an insurance loss.

A normal FICO credit score looks at many different factors to determine how likely you are to repay a loan or line of credit. NAIC says a credit-based insurance score looks at some, but not all, of the factors in your credit history to determine how you’re likely to manage your risk exposure.

Federal regulators have investigated the issue of credit-based insurance scores but have taken no action to mitigate them. The Federal Trade Commission is legally required to periodically examine whether credit scores and credit-based insurance scores affect the availability and affordability of consumer credit, as well as auto and homeowners insurance.

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