How Does Bad Credit Affect Car Insurance Rates?
Spoiler alert: it makes it more expensive.
Nothing like beating up on those who are already down. Unfortunately, that’s the way of the world. It’s a lot like loans. The people who most need to keep their payments down – because of financial problems – are the same people who get socked with the highest interest rates. Seems unfair, but it also makes sense. From a lender’s (or in this case, insurance companies) perspective if you haven’t been able to manage your finances to the point that you pay all your bills on time, statistics show that you’re less likely to do it in the future – as compared with those who always meet their financial obligations. Read the article below to get the full scoop:
If you have bad credit, you might be wondering what options you have for car insurance. So how does bad credit affect car insurance rates? Find out here.
You may have read that bad credit can cause your insurance premiums to increase. But maybe you’ve ignored this advice. After all, it’s not intuitive. Plus, you might think, the difference can’t be that bad.
According to the study, someone with a middle-of-the-road credit score could expect to pay up to 36 percent more for home insurance than someone with excellent credit. And the gap between consumers with poor credit and those with excellent credit is even wider. In fact, in many states, consumers with poor credit could pay more than double what excellent-credit consumers pay for their home insurance!
The graphic below highlights the poor-vs-excellent credit score gaps for the top ten worst states:
A similar report by Consumer Reports shows that credit differences similarly affect auto insurance, though the effects are often less pronounced. This report breaks down some of the “dark side” of this practice. It notes the fact that car insurance companies basically cherry pick information from your credit report and feed it into their own algorithms. So consumers don’t have a clear picture of which credit scoring factors most affect their car insurance rates.
Why Does Bad Credit Affect Car Insurance Rates?
So it’s clear that your credit score does affect your insurance rates. But now the question is: why?
Credit scores are meant to predict consumer behavior. Your standard FICO credit score is set up to show how likely you are to default on debts. As such, it tells potential lenders how risky you would be to take on as a customer.
According to the National Association of Insurance Commissioners, the scoring process your insurance company uses is different. It’s called a credit-based insurance score, and it uses only certain elements of your credit report. The goal of the score is to show how likely you are to have an insurance loss. In other words, this form of your score shows how risky you are to insurers, rather than lenders.
Insurers are only allowed to use this type of scoring in some states, though most do allow it on some level. Like your credit score, your credit-based insurance score can’t take into account certain personal information like race, color, national origin, religion, gender, marital status, age, and location of residence. Though some of those factors count towards your insurance premium calculation in other ways.
So, it may seem unfair, but there’s nothing we can do about it. The only thing we can really do is shop around for the best rates, improve our credit. Or take the bus. We’re forever at the mercy of the Golden Rule, i.e., he with the gold makes the rules. It’s a free country, but it’s expensive.