It’s well known that, for better or worse, a combination of actuarial factors are used to decide how much a given motorist will pay for auto insurance.
These include a person’s age (younger drivers pay more), gender (men face higher rates), marital status (it pays to be married), address (urban dwellers pay more), driving record (accidents and tickets drive up rates quickly), and a specific vehicle’s claims history with regard to damage costs and fatalities (minivans and SUVs tend to be favored in this regard).
But one of the industry’s lesser-known qualifiers is a policyholder’s credit rating, with those having lower “FICO” scores generally being charged more than those having top ratings. A report conducted by the personal finance website Nerdwallet.com shows that drivers having low scores can face insurance rates that are up to 61% higher than for those having excellent credit.
According to the Consumer Federation of America (CFA), 95% of auto insurers use credit scores in their pricing of insurance policies. According to FICO, top-tier borrowers have a score of 720 and above, with those at 690-719 coming in at a close second. Those having lower scores are considered “subprime” will have to pay considerably steeper interest rates for loans and, in most states, higher car insurance premiums as well.
In some cases, having a dismal credit score can hike up rates more than being ticketed for driving under the influence. Even those having clean driving records can be dunned higher rates if their credit histories are pockmarked with late payments and/or delinquencies. With interest rates and insurance premiums already trending higher, that’s a one-two punch that can make buying and operating a car beyond the financial reach of credit-challenged consumers.
“So many safe drivers are facing insurance premium hikes, simply because the pandemic wreaked havoc on their finances and credit,” says Doug Heller, Director of Insurance for the Consumer Federation of America.
How much more will those having below-average credit scores pay for car insurance? Nerdwallet.com’s data shows the average policyholder with good credit pays $2,148 annually for full coverage and $685 for minimum coverage. A driver with poor credit, on the other hand, gets a bill that averages $3,455 for full coverage, or $1,118 for the minimum required. What’s more, as with everything else with regard to insurance, it varies—widely in some cases —from one state to another.
For example, Nerdwallet.com’s analysis shows that consumers living in Maine and having excellent credit scores pay an average $1,323, while those with low scores are charged $2,299. In Kentucky, this spread is a considerably higher $3,357/$6,156, respectively. On the plus side, a few states – California, Hawaii. Massachusetts, Michigan, and Washington – prohibit carriers from using credit ratings to determine premium costs.
What’s more, some insurance companies are more forgiving of their policyholders in this regard than others. Nerdwallet.com found that among nine major insurers, Nationwide had the lowest annual premium hike based on credit scores at an average $850, while it’s a considerably higher $2,053 with State Farm; we’re featuring the full list below.
Obviously there’s more going on here than simply charging more for the risk of taking on someone who presents a potential for not paying their premiums down the road. If a policyholder skips paying the bill, coverage is simply canceled following a stipulated grace period. This is a far quicker and simpler process than foreclosing a home or repossessing a car if a mortgage or auto loan goes into default.
The official reason, at least according to provider State Farm is that, “Certain credit information can be predictive of future insurance claims.” By that yardstick a provider assumes that someone having a higher credit score is more responsible and is less likely to drive recklessly and get in an accident, or that a motorist that’s deep in unpaid bills might be unduly stressed and become distracted or inattentive behind the wheel.
FICO scores are created and curated by the Fair Issac Corp, and are largely based on a person’s payment history and outstanding balances. Other considerations include length of credit history, credit lines recently opened and one’s credit mix (credit cards, retail accounts, installment loans, etc.). In addition to the FICO score, a credit report discloses all open and closed credit sources, credit inquiries/applications made and information on overdue debt, bankruptcies and civil lawsuits. Having late or missed payments, debt collections, bankruptcies, exceeded credit limits and/or outstanding tax liens will send a FICO score plummeting.
Policyholders regardless of their credit scores, should shop around for the lowest rates annually, especially following life changes that can trigger actuarial consequences, whether positive (getting married) or negative (getting a serious moving violation). It’s also important to claim any applicable discounts, such as for bundling multiple policies, having a security system installed, or driving only a limited number of miles per year.
It’s also a good idea to check one’s credit score annually via a financial institution or online service and work on improving it if necessary. Experts advise steadily paying down existing debt, especially high interest-rate credit cards, and make all payments on time. Pay off or keep balances minimal. But FICO recommends against applying for additional credit cards or close unused accounts in an attempt to boost a credit score. Likewise, avoid transferring debt from one source to another to chase a nominally lower interest rate or purchasing perks. Either of these tactics could backfire and result in a lower credit score.
Here is Nerdwallet.com’s list of the national average annual car insurance rates from nine major carriers for safe drivers having good credit/poor credit:
- Allstate: $3,110 / $4,408
- American Family: $1,547 / $2,570
- Farmers: $2,807 / $4,407
- Geico: $2,009 / $2,938
- Nationwide: $2,016 / $2,866
- Progressive: $2,075 / $3,590
- State Farm: $1,431 / $3,484
- Travelers: $1,751 / $3,152
- USAA: $1,120 / $2,013
The full report can be found here.
The above content was 100% generated by a human contributor.
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