Drivers with no moving violations or accidents and bad credit scores often pay more — and sometimes double — for car insurance than safe drivers with high credit scores, according to a study released by a consumer watchdog group.
The Consumer Federation of America bought price data from Quadrant Information Services, an independent company that gathers data on insurance premiums, to see how credit scores affect car insurance rates for State Farm and Allstate in metro areas including Atlanta, Baltimore, Houston, Seattle and Hartford, among others.
The study evaluated price data on minimum liability coverage for a 30-year-old woman employed in a clerical job, living in a ZIP code with a median income of $30,000, with no lapse in coverage and no accidents, moving violations or suspensions, driving a 2000 Honda Civic EX about 10,000 miles per year. It used 10 levels of credit score.
The average annual premium in nine major U.S. cities for this driver, according to the study:
• State Farm — $563 if she has excellent credit, $755 if she has average credit and $1,277 if she has poor credit.
• Allstate — $948 if she has excellent credit, $1,078 if she has average credit and $1,318 if she has poor credit.
The results, according to the federation, showed that State Farm customers with “poor” credit scores were charged about twice as much as those with “excellent” credit scores in most cities. Prices charged by the State Farm companies were at least 94 percent higher for “poor” than for “excellent” credit scores with an average of 127 percent higher.
In the Baltimore ZIP Code, for example, State Farm Mutual prices ranged from $2,788 for a poor score to $1,030 for an excellent score, according to the report. For the State Farm F&C company, prices ranged from $3,909 for a poor score to $1,467 for an excellent score.
Allstate rates in the Baltimore ZIP code ranged from $1,399 a year for a poor score, compared to $1,001 for an excellent score. For the Allstate P&C company, the prices ranged from $2,834 for a poor score to $1,613 for an excellent score.
The CFA praised California, Hawaii and Massachusetts, noting that they ban the use of credit information to determine rates, and advised other states to follow their example.
“It is simply not fair to ask the poor to pay more for auto insurance just because they’re poor,” said J. Robert Hunter, CFA’s insurance director, in the report. “Lower-income families tend to have lower credit scores just because they have less discretionary income and more insecure jobs.”
Stephen Brobeck, the federation’s executive director, noted that the wealthy, those most able to shoulder larger premiums, often pay less because they have better credit. He also said a 2012 CFA survey showed that two out three people nationwide oppose insurers using credit histories to set prices. A 2009 survey commissioned by the Iowa Insurance Department had similar results, according to the CFA.
“Americans reject the use of credit scores because they don’t think someone who’s had difficulty paying debts should automatically be charged higher premiums,” he said. “After all, if drivers don’t pay their insurance premiums, insurers are not obligated to pay claims.”
Credit scoring as part of the underwriting process has been controversial for some time. The CFA and other consumer groups have long contended that it has nothing to do with how safely someone drives. Further, they claim the practice discriminates against minorities who often are poorer.
Insurers, however, say data indicates a high correlation between credit history and the number and cost of claims filed. Statistically, they note, people with bad credit file more claims. Besides credit scores, insurers consider various factors when deciding premiums, including driving record, age, where you live, your marital status and the model of your car.
Robert Hartwig, president of the Insurance Information Institute (III), a New York-based trade association, argues there is a strong correlation between credit scores and insurance claims. Drivers with the lowest credit scores file 40 percent more claims than drivers with the highest credit scores, according to the III.
“Insurers have been using credit information to assess risk in auto insurance for nearly 20 years,” says Hartwig. “Over that time, numerous studies have shown that an individual’s credit history is a proven, accurate indicator of how likely that person is to file a future claim, and the potential cost of that claim.”
The use of credit-based insurance scores is common in the insurance industry and financially benefits most consumers, Hartwig says. A driver’s moderate-to-strong credit history may offset otherwise negative underwriting factors he or she might have, such as a poor driving record.
Besides impacting auto insurance costs, your credit score sets what you’ll pay for loans and other credit. Many landlords check scores to see if you’re financially worthy, and even employers evaluate these numbers during hiring. Clearly, it’s good to get them high and keep them high. Here are a few tips:
• Get free copies of your credit reports through AnnualCreditReport.com, review them and follow instructions for correcting any factual errors.
• Try to catch up on late payments to creditors and pay your bills on time.
• Maintain credit card balances under 30 percent of credit limits.
When a person’s revolving debt is 16 percent or more of net income, he or she is considered an indebted household. Looking only at indebted households, the average credit card debt owed is $15,325 per household.
FICO credit scores range from 300 to 850. The median credit score – which means half of people have a lower score and the other half have a higher score – is 723.