Insuring Cars Without Credit Scores

In the US, most car insurance companies use credit scores to set rates and approve or renew auto policies. However, this doesn't mean that those without a good credit score are unable to get car insurance. While it is true that drivers with poor credit are statistically more likely to file claims, and are therefore considered higher-risk, there are still options for those with a less-than-perfect credit score.

Some US states don't allow credit checks for auto insurance rates

In the United States, insurance companies use credit-based insurance scores to help set insurance rates and approve or renew auto policies. These scores are based on an individual's credit report and are designed to predict how likely they are to file a claim that will lead to a loss for the insurer. While most states allow insurance companies to use credit-based insurance scores, some states have strict limitations on their use.

As of 2024, there are eight states that have strict laws prohibiting or restricting the use of credit scores in determining auto insurance rates:

• California: Insurance companies in California are not allowed to use credit-based scores or credit history for underwriting or setting rates for auto policies.
• Hawaii: Hawaii bans the use of credit ratings in setting standards, including underwriting and determining premiums for auto insurance.
• Maryland: While credit history can be considered for new policies, auto insurers cannot use it to deny applications, cancel policies, or increase premiums during renewal.
• Massachusetts: Auto insurance companies are prohibited from using credit information or credit-based insurance scores when setting rates, underwriting, or renewing policies.
• Michigan: Insurance companies cannot use credit scores or credit history as a factor in denying, cancelling, or refusing to renew auto policies. They also cannot use credit scores to determine rates.
• Nevada: Through May 20, 2024, insurance companies in Nevada cannot consider negative credit information from events after March 1, 2020, when making decisions about policies.
• Oregon: Insurance companies cannot cancel or refuse to renew a policy based on credit but can consider it when deciding whether to offer a new policy. They are limited in the type of credit information they can use.
• Utah: Credit information can be used when initially underwriting an auto policy, but it cannot be the only factor. After 60 days, credit information cannot be used to cancel or refuse to renew a policy or decline coverage for a new vehicle. Credit information can only be used to offer discounts on premiums.

Additionally, there is pending legislation in Washington State that aims to prohibit the use of credit scores in insurance pricing.

Usage-based insurance bases premiums on how much you drive

Usage-based insurance (UBI) bases premiums on how much you drive, as well as other factors such as driving behaviour. UBI is also known as pay-as-you-drive (PAYD), pay-how-you-drive (PHYD) and mile-based auto insurance. This differs from traditional insurance, which rewards "safe" drivers with lower premiums. However, these rewards are based on historical data rather than present patterns of behaviour. This means that it can take a long time for safer (or more reckless) driving patterns to be reflected in premiums.

UBI is a fast-rising technology in the car insurance industry. According to Allied Market Research, the market value of UBI was $28.7 billion in 2019 and is expected to reach $142 billion in 2027. Some customers prefer UBI to conventional insurance programs.

UBI programs generally measure speeding, acceleration, harsh braking, mileage and the time of day you drive. You get a driving score and often tips for improving your score. The better your score, the better your auto insurance rates.

There are two main types of UBI:

• Mileage-based or pay-per-mile: This type of insurance plan allows you to customise your policy according to the miles you drive. Insurers will calculate your payments based on the mileage you cover within an agreed limit.
• Driving-based: This type of UBI considers your driving history and behaviour to determine a suitable premium. Under this plan, an insurer will monitor your speed, braking patterns, acceleration and other driving habits for a specific time. When renewing your insurance policy, you will get a discount for being a safer driver.

UBI has several advantages:

• Discounted insurance premiums: UBI promises discounted premiums and long-term savings on insurance costs if you consistently demonstrate good driving habits.
• Promotes safer driving: Motorists who opt for UBI are likely to drive cautiously to avoid penalties that may hinder them from getting discounts.
• Improves your driving habits: UBI can help you embrace good driving habits by providing real-time insights and feedback about your driving tendencies.
• Facilitates accident investigation and claim processing: Telematics devices provide reliable data that can help identify the at-fault driver during an accident.
• Enables faster vehicle tracking: UBI uses a software platform installed in the car for tracking. An approved vehicle tracker and GPS equipment can pinpoint the vehicle's location in real time, allowing for easy monitoring.

However, there are also some disadvantages to UBI:

• Possible data breaches: Plug-in devices installed in cars operate around the clock to record your location and driving habits. While insurers have a legal obligation to protect this data, it is still prone to privacy concerns and cyber-attacks.
• Biased data interpretation: Telematics devices may lead to the wrong interpretation of your driving habits. For example, if you apply instant brakes to avoid hitting a pedestrian, the device would record hard braking and portray you as a high-risk motorist.
• Difficulty installing apps and switching insurers: UBI requires the installation of an approved tracking device or the download of a mobile app. This process can be tedious, especially if you have multiple vehicles. Additionally, auto insurance companies may have unique specifications regarding tracking devices, which can make switching insurers more difficult.

Telematics insurance bases premiums on driving behaviour

Telematics insurance, also known as usage-based insurance, pay-as-you-drive insurance, or pay-per-mile insurance, bases premiums on driving behaviour. This type of insurance uses telematics devices or mobile apps to track driving habits such as average speed, acceleration, braking, cornering, phone use while driving, and the time of day and location of driving. The data collected is then used to calculate the driver's risk level and adjust insurance rates accordingly.

Telematics insurance programs can offer significant discounts, typically ranging from 25% to 40%, for drivers who demonstrate safe driving behaviours. These programs may also provide feedback and alerts to help drivers improve their driving habits. However, it's important to note that some programs can lead to increased rates for drivers who are categorised as "bad drivers" due to behaviours such as harsh braking or frequent late-night driving.

When choosing a telematics insurance program, individuals can usually pick their preferred telematics technology, such as a smartphone app or a plug-in device that connects to the car's diagnostics port. It's worth noting that different devices may track different types of data. For example, a smartphone app can track phone use while driving, but a plug-in device may not have that capability.

While telematics insurance can provide benefits such as potential discounts and improved driving skills, it also raises privacy concerns. Some individuals may be uncomfortable with the idea of their driving behaviour being monitored and their data being shared. Additionally, there are concerns about potential biases in the data collection process, as certain tracked behaviours, such as late-night driving, may disproportionately affect specific groups, such as low-income workers.

Before enrolling in a telematics insurance program, it is essential to carefully review the program's terms and conditions, understand the data being collected, and consider the potential impact on insurance rates and privacy.

Poor credit history doesn't necessarily mean higher rates

While it is true that insurance companies use credit scores to set rates and approve or renew auto policies, a poor credit history does not necessarily mean higher rates.

In the US, there are several states that have laws that do not allow the use of credit information as part of car insurance pricing. These include California, Hawaii, Maryland, Massachusetts, and Michigan. In Oregon and Utah, insurance companies cannot cancel or refuse to renew coverage based on the policyholder's credit, although it can be used when underwriting a new policy.

Even in states where credit history is considered, insurance companies are generally not allowed to base approvals and rates solely on your credit score. They will also take into account other factors, such as your age, gender, marital status, the type of vehicle you drive, and any discounts you may qualify for.

If you have a poor credit history, you can still shop around with different companies to compare rates and coverages. If you have a clean driving record, you may find that you can get affordable car insurance despite your credit concerns.

Additionally, there are some insurance companies that offer auto insurance with no credit check, although this does not necessarily mean you will pay a lower rate than with a company that does check your credit. These companies base your car insurance premiums on other factors, such as usage-based or telematics-based insurance.

In summary, while credit history can be a factor in determining auto insurance rates, it is not the only factor, and there are options available for those with poor credit to find affordable coverage.

Improving your credit score can lower your insurance premium

Firstly, it is important to understand the factors that determine your credit-based insurance score. These include payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix. By understanding these factors, you can take targeted actions to improve your score. For example, you can focus on making timely payments, reducing your debt, and maintaining a long credit history.

Another way to improve your credit score is to review your credit report regularly. Order free copies of your credit report from major credit bureaus and scrutinize them for any errors or discrepancies. Disputing and correcting any inaccuracies can have a positive impact on your score. Additionally, keeping your credit utilization low by staying below the recommended credit card utilization rate can also boost your score.

It is also beneficial to demonstrate responsible financial behaviour by paying your bills on time. Your payment history has a significant weight in determining your credit score, so setting up automatic payments or calendar alerts can help you avoid late payments and improve your creditworthiness.

Furthermore, it is worth noting that your credit-based insurance score is different from your regular credit score. Insurance companies use industry-specific scoring models, such as those created by FICO or LexisNexis, to assess your risk as a policyholder. These models take into account factors like payment history, outstanding debt, and credit history length but weigh them differently from traditional credit scoring models.

By implementing these strategies and focusing on maintaining a good credit history, you can improve your credit score and, consequently, lower your insurance premium. A higher credit score demonstrates financial responsibility and lowers your risk profile, leading to more favourable insurance rates.

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