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Bad credit can cost you in car insurance

May 29, 2014

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Pay a lot for car insurance? It may be your bad credit. However, you can shop around and take other steps to lessen the impact of a shaky score on your wallet.

Troy Thompson, an independent insurance agent and principal at Pinnacle Insurance Agency of Minnesota, says he's had clients shell out $200 a month instead of the $100 they would have paid had their credit been pristine. That's a worst-case-scenario, though: He says a few late payments will have less impact on your rates than a bankruptcy or foreclosure.

Most insurers use credit as a factor in calculation of insurance rates, though the practice is prohibited in California, Hawaii and Massachusetts, according to United Policyholders, a nonprofit consumer advocacy group for insurance.

“Not many people realize how much of an impact their credit can have on their auto insurance premiums,” Thompson says.

How it works

When you apply for a car loan, a mortgage or a credit card, many lenders will use your FICO credit score to decide whether to extend credit. However, insurers don't use that score: They use what is known in the industry as an insurance score, says Robert Hunter, director of insurance for the nonprofit consumer advocacy group Consumer Federation of America (CFA).

Insurance companies use the same raw data, supplied by the three major credit bureaus (Equifax, Experian and TransUnion), but they weight the data differently, Hunter says.

“They're not trying to see if you're going to pay your bill. They're trying to see if you're more apt to have an accident,” Hunter says. He adds that CFA opposes the use of credit data in setting auto insurance rates because there is no evidence that worse credit causes a driver to have more crashes and claims, and the practice has an unfair impact on low- and middle-income consumers.

However, Jeanne Salvatore, senior vice president of public affairs for the industry-supported Insurance Information Institute, says the use of credit helps auto insurers determine risk. “It's statistically been proven time and time again that, as a group, those with poor credit get into more accidents than those with perfect credit,” Salvatore says, adding that there are exceptions.

Some insurers — often larger ones — have proprietary scoring models they use to create insurance scores, Hunter says. One company might have a sliding scale of one to 10, while some might have scores that range from, say, 450 to 1,000, Thompson says.

Other insurers — usually smaller companies — might buy insurance scores from a vendor, such as FICO, which offers credit-based insurance scores to insurers, Hunter says.

But your credit score isn't the only factor that has a big impact on your premium: Insurance companies also heavily weigh two other factors: your driving history — for example, accidents and speeding tickets — as well as how many claims you've had, Thompson says.

“If you're great on all three of those, you're going to have the best rates,” he says.

Getting a better deal with bad credit

If you do have shaky credit, you still have some power to get a better rate. Here are six steps you can take:

  1. Shop around. Some insurers put so much weight on financial history that they refuse to insure a consumer who has a recent bankruptcy, Thompson says. Other insurers place less importance on credit. Hunter recommends going to the website of your state department of insurance, where you can typically get sample rates for various companies. He suggests getting quotes from the five companies with the lowest rates, leaving out companies that have a high consumer complaint ratio.
  2. Consider visiting an agent. If you want the help of an independent agent — one who represents multiple companies — go after you've done some shopping, Hunter recommends. “Say: 'Here are the [levels of] coverage I want and I've got a rate of about $700. Can you beat that?'” Hunter says.
  3. If you're charged more, find out why. If a company charges you a higher rate or denies you insurance based on information in your credit report, get more information, says Carroll Lachnit, a features editor for the automotive site The federal Fair Credit Reporting Act requires the insurer to give you the name and address of the credit reporting agency and the credit score used to make the decision. If your poor credit is the result of a life event such as a medical catastrophe or job loss, you can explain your situation and ask the insurer to reconsider. “They don't have to do it, but you can ask,” Lachnit says.
  4. Find discounts to lower your rates. If you're a good driver, you might consider  programs such as Snapshot, from Progressive,  or Drivewise, from Allstate, that allow you to install a device in your car and, based on your driving, possibly get a discount of up to 25 percent or more, depending on the program.  The device tracks how many miles you drive, how well you drive — for example, how often you brake hard or swerve — and what time of day you drive.
  5. Work on your credit. Check your credit report from each of the major credit bureaus for free once a year at, Lachnit recommends. Correct any errors and take steps such as paying your bills on time and paying down debt to improve your credit score.
  6. Maintain good credit. Once you've improved your credit score, do your best to keep it high. Insurers periodically recheck policyholders' insurance scores, so just because you got a good rate for having good credit once, that doesn't mean it's locked in. Some companies might run your insurance score annually while others might do it every two or three years.

“Keep your insurance score good so your rates won't shoot through the roof,” Thompson says.











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