Bad Credit Can Cost You More on Auto Insurance Premiums
You know that having bad credit can increase your auto loan’s interest rate, but did you realize credit problems can in some cases nearly quadruple your car insurance premiums, too?
“Most people have no clue that this is happening,” says Odysseas Papadimitriou of market tracker WalletHub, which recently analyzed more than 500 price quotes from car insurers to see how credit scores affect premiums.
U.S. carriers have long used credit scores as one factor in setting customers’ auto insurance rates because research has found that people with bad credit typically file more claims and get higher aggregate payouts over time. (California, Hawaii and Massachusetts ban the practice.)
To find out how much credit woes raise premiums, WalletHub used real information about two of its employees — one with excellent credit, one with no credit history — to see what price insurers quoted each for identical coverage.
The firm got online price quotes using each staffer’s real name and Social Security number, but pretended both had the same car, ZIP code, driving experience and other details to control for everything other than credit score.
To see if price quotes varied by location, WalletHub also ran its test using ZIP codes from all 50 states and the District of Columbia. All told, the firm got 510 quotes — one for each employee from America’s five largest carriers, using addresses in all 50 states and D.C.
Overall, WalletHub found that when it averaged all price quotes regardless of insurer or location, carriers wanted the staffer with no credit history to pay 65% more than they offered the person with excellent credit for identical coverage.
Allstate had the biggest overall differential, asking the tester with no credit to pay $3,096 on average for a year for coverage regardless of location — 116% more than the firm wanted from the driver with great credit.
Other average price differences ranged from 83% at Farmers Insurance to 56% at Geico, 47% at Progressive and 45% at State Farm.
WalletHub also discovered that:
1. Allstate had the study’s single largest price differential among all 510 quotes reviewed. The carrier wanted the tester with no credit history to pay $4,016 a year for coverage in Indiana — 256% more than the $1,128 it offered the driver with excellent credit. State Farm had the lowest single differential, offering the WalletHub employee with no credit a policy in Montana for just 10% more than what the tester with top-notch credit would have had to pay. More details:
2. D.C. drivers with credit problems apparently face the nation’s highest average price differentials. When WalletHub used a D.C. ZIP code, carriers quoted the tester with no credit history a premium averaging 126% more than what they offered the person with excellent credit.
3. Vermont had the lowest average price differential (excluding states that ban credit-based premiums altogether). When WalletHub used a Green Mountain State ZIP code, insurers wanted the tester with no credit to pay just 18% more than the price they quoted the driver with great credit.
4. Papadimitriou says WalletHub used a tester with no credit history because no one at the company had bad credit. But the expert, a former Capital One senior director, says people with poor credit can expect “the same results or even bigger price differences.”
Geico did not respond to WalletHub’s request for comment on the study, while State Farm and Progressive declined to comment and Allstate and Farmers noted that several factors go into setting customer pricing.
Still, Papadimitriou recommends that consumers protect themselves from credit-related premium hikes by first and foremost checking to make sure their credit reports don’t contain any errors.
Under federal law, the nation’s three major credit bureaus (Experian, Equifax and TransUnion) must each give you a free copy of your credit report once per year and quickly fix any problems that you bring to their attention. Papadimitriou suggests getting a report from a different credit bureau every four months to boost the odds that you’ll spot mistakes quickly.
Beyond that, he recommends studying how credit scores work and taking steps to maximize your rating (such as not “maxing out” any credit cards).
Papadimitriou also suggests getting price quotes from several insurers to see who’ll give you the best deal regardless of your current credit status.
“It’s important to comparison shop, because [carriers] all tend to look at different data and reach different conclusions,” he says.