Auto Insurance And Credit Scores: State-By-State Breakdown

Credit-based insurance scores are used by car insurance companies to determine how likely someone is to file a claim, and these scores can affect insurance rates. While the practice is banned in California, Hawaii, Massachusetts, and Michigan, it is allowed in most other states. Insurance companies argue that there is a correlation between credit and the chances of filing a claim, with better credit resulting in lower rates. However, critics argue that it is unfair to base auto insurance rates on credit scores as it cannot predict a driver's accident risk.

California, Hawaii, Massachusetts, Michigan and other states that ban the use of credit-based insurance scores

California, Hawaii, Massachusetts, and Michigan are among the few states that prohibit or limit the use of credit scores in determining auto insurance rates. In California, credit-based scores and credit history do not affect the underwriting or rating of auto policies or the rates for homeowners insurance. Similarly, Hawaii bans the use of credit ratings in setting standards, including underwriting standards and rating plans that determine auto insurance premiums.

In Massachusetts, auto insurance companies are forbidden by law from using credit information or credit-based insurance scores when setting rates, underwriting new policies, or renewing policies. This also applies to homeowners insurance rates. Michigan also follows a similar protocol, where credit or credit-based insurance scores cannot be used to deny, cancel, or refuse to renew auto or homeowners policies. Additionally, auto insurers cannot use credit scores to determine insurance rates.

Other states like Maryland, Nevada, Oregon, and Utah have also imposed certain restrictions on the use of credit scores for auto insurance rates.

How credit-based insurance scores are calculated

Credit-based insurance scores are calculated using a variety of factors, including:

• Payment history: This includes information on how well you have made payments on your outstanding debt in the past, including the frequency and amount paid off. This is often the most heavily weighted factor, with FICO giving it a weight of 40%.
• Outstanding debt: The amount of debt you currently have. FICO weights this factor at 30%.
• Length of credit history: How long you have had a line of credit. This factor is given a weight of 15% by FICO.
• Pursuit of new credit: Whether you have recently applied for new lines of credit. This is weighted at 10% by FICO.
• Credit mix: The types of credit you have, such as credit cards, mortgages, auto loans, etc. FICO gives this a weight of 5%.

It is important to note that these weights may vary depending on the company calculating the score, and that credit-based insurance scores are not the same as traditional credit scores. While traditional credit scores focus on predicting the likelihood of an individual paying their debts, credit-based insurance scores are designed to predict the likelihood of an individual filing an insurance claim.

In addition, credit-based insurance scores cannot use any personal information, such as race, income, occupation, or location of residence, in their calculations.

How credit scores impact insurance premiums by state

Credit scores can have a significant impact on insurance premiums, with drivers with poor credit often facing substantially higher rates. This is because insurers believe that those with poor credit are more likely to file insurance claims. While the impact of credit scores on insurance premiums varies by state, certain states, including California, Hawaii, Massachusetts, and Michigan, have banned or restricted the use of credit scores in determining insurance rates.

In states that allow it, insurance companies use credit-based insurance scores, which are different from traditional credit scores, to assess the risk of insuring a driver. These scores are based on credit reports and predict the likelihood of a driver filing an insurance claim. Drivers with poor credit are considered higher-risk and are often charged higher premiums to compensate for the potential cost of claims.

The impact of credit scores on insurance premiums can be significant. On average, drivers with poor credit pay up to 115% more for full coverage car insurance than those with excellent credit. This can result in annual premiums that are over $1,000 higher for drivers with poor credit.

However, the weight given to credit scores in determining insurance premiums varies by state. In some states, such as Washington, D.C., poor credit can more than double insurance rates, while in other states, such as Washington, the impact is less pronounced. Additionally, some states, like New Jersey and Rhode Island, prohibit insurance companies from charging higher rates based on a lack of credit history.

While credit scores can influence insurance premiums, they are not the only factor. Insurance companies also consider driving records, location, demographics, vehicle type, insurance coverage, and discounts when determining rates. It is important for drivers to shop around and compare quotes from multiple insurance companies, as rates can vary significantly.

The legality of using credit-based insurance scores

States with Restrictions or Bans

California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah have strict limitations on the use of credit-based insurance scores for auto insurance. In these states, credit history cannot be used as the sole factor in determining insurance rates or eligibility. Some states, like Maryland and Oregon, allow credit history to be considered when offering a new policy but not for renewals or cancellations. Additionally, Nevada has temporarily restricted the use of negative credit information for insurance decisions during the pandemic until May 20, 2024.

States Allowing Credit-Based Insurance Scores

The majority of states permit insurance companies to use credit-based insurance scores when making decisions about whom to insure and how much to charge. These scores are designed to predict the likelihood of an individual filing an insurance claim, which helps insurers assess their risk.

Controversy and Concerns

The use of credit-based insurance scores is controversial. Consumer groups have raised concerns about a lack of understanding and transparency around the concept. There are also allegations that the use of these scores disproportionately impacts certain minority and low-income groups.

Legislative Efforts

Legislative efforts have been made to address the use of credit-based insurance scores. For example, the Prohibit Auto Insurance Discrimination (PAID) Act, introduced in 2020, aimed to ban the use of credit scores and other non-driving factors in determining insurance rates. While the bill did not pass, there may be future legislative attempts to regulate the practice.

How to improve your credit score

Improving your credit score is an important aspect of managing your financial health effectively. Here are some detailed and direct strategies to help you achieve that:

• Pay your bills on time: Paying your bills on time is crucial for maintaining a good credit score. Late or missed payments can negatively impact your score and stay on your credit report for up to seven years. Set up autopay or reminders to ensure timely payments.
• Keep hard credit inquiries to a minimum: Hard credit inquiries occur when you apply for new credit and can negatively affect your score. Limit your applications for new credit lines and consider waiting before applying for loans or credit cards.
• Monitor your score regularly: Keep track of your credit score to identify any errors or signs of identity theft. Regularly checking your score enables you to take proactive measures to improve it.
• Maintain old lines of credit: Keeping old credit accounts open, especially your oldest one, can positively impact your score. The length of your credit history is a significant factor, accounting for 15-20% of your score.
• Be mindful of your credit utilization ratio: Aim to keep your credit utilization below 30%. This ratio is the percentage of available credit that you're using. Keeping it low reflects good credit utilization habits and can improve your score.
• Diversify your credit mix: Having different types of credit, such as credit cards, loans, and mortgages, can strengthen your credit mix and improve your score. However, avoid taking on unnecessary debt just for the sake of building credit.
• Dispute inaccurate information: Inaccurate information on your credit report can negatively impact your score. Regularly review your reports and dispute any errors or signs of identity theft with the credit bureaus.
• Become an authorized user: If you're new to credit, consider asking a family member or friend with a good credit history to add you as an authorized user on their credit card. This can immediately improve your score.

Frequently asked questions