Insurance companies decide your premium using an algorithm that determines the risk of providing insurance products to you. The higher the risk to insure you, the more expensive your policy will be. If your risk assessment exceeds a certain level, the company may reject your application entirely. But how do insurance companies determine your risk level?
Insurance providers determine your level of risk through algorithms that analyze your personal characteristics. Depending on the state’s regulations and the insurance company’s specific practices, underwriters may consider an applicant’s age, ZIP code, driving or medical history, claims history, credit history, gender, and more. After analyzing these characteristics, the company assigns a credit-based insurance score to you, corresponding to how likely you are to file a claim. Note that certain states prohibit the use of age, gender, or credit score in determining an applicant’s premium.
Consumer groups worry that assigning credit-based insurance scores disproportionately disadvantages low-income households and marginalized communities.
According to a 2021 survey published by Credit Sesame, Black and Hispanic Americans were shown to have statistically lower credit scores than white and Asian Americans.
When lower-income Americans who have poor credit scores according to FICO have to pay a higher insurance premium, they may make the difficult choice to drive without insurance due to the financial strain.
In fact, a study from the Consumer Federation of America states, “The cost of state-mandated basic liability insurance is higher than many lower-income Americans can afford, and the number of uninsured citizens in this category is higher than the national average as a result.”
What is the impact of using credit-based insurance scores?
Since credit-based insurance scores can lead to adverse outcomes for certain groups, several lawsuits and legislation have emerged regarding the issue.
A recent court case in the state of Washington explored the issue of using credit history as a rating factor. During the pandemic, Washington State Insurance Commissioner Mike Kreidler issued an emergency ban on credit scoring for insurance pricing. Several insurance groups sued, stating that Kreidler’s emergency order was invalid since, they argued, the pandemic did not meet the criteria necessary to be considered an emergency. A Washington judge ruled in favor of the insurance industry and reinstated the use of credit scoring.
After Kreidler lost the court battle, he backed a state bill through the legislature meant to ban the use of credit scores. However, the bill failed. Afterward, Kreidler issued a statement pledging to continue the fight to ban credit scoring in Washington.
Similarly, in 2021, the Colorado Senate passed legislation banning insurance companies from using consumer data in ways determined to be “unfairly discriminatory” when calculating insurance premiums.
As these debates heat up, you may want to keep track of whether your state legislature is considering a ban on credit scoring. A credit ban on the insurance industry may be beneficial to consumers who:
- Are members of low-income households: Nearly one-third of U.S. adults are part of a lower-income household. They are more likely to have poor or no credit history, which may make it difficult to find affordable insurance products. Eliminating credit scoring could help these individuals get better rates.
- Are a member of certain marginalized groups: Black and Hispanic Americans, on average, have lower credit scores and more frequent instances of no credit history compared with other racial groups, according to CNBC. As a result, Black and Hispanic Americans may be paying more than their Asian American and white American counterparts for the same insurance product. A ban on credit scoring may help equalize average insurance premiums across racial groups.
- Have little to no credit history: If you’re credit invisible (sometimes referred to as a “credit ghost”), you may still be great with your money, but your insurance company may be suspicious of your no-credit past. You may be able to get a lower insurance rate if your state prohibits credit scoring.
- Have poor credit: Regardless of your income level, a poor credit score can make it hard to find affordable insurance. If you have great claims history but your credit score is holding you back, your state eliminating the use of credit scoring could help you.
Why and how to get your annual free credit report
Before getting a car insurance quote, you may want to know what your credit report contains. Credit reports contain four parts:
- Personal information
- Credit account history
- Credit inquiries
- Public records
If lenders or companies conduct a “hard inquiry” on your credit history, your credit score can decrease. However, most car insurance companies will complete a “soft inquiry,” which does not affect your score.
Once a year, you can pull your free annual credit report to see where you stand. Federal law protects your ability to pull this credit report without affecting your credit score. You may want to pull your credit report to see if there are any errors on it and make corrections to it.
This free credit report is not the same thing as free credit scores. Unlike with your credit report, you are not entitled by law to see your credit score free of charge. If you’re interested in checking your credit score for free and without affecting your score, you may want to consult a guide on how to check your credit score.
How your insurance score affects your car insurance premium
Insurance companies view your credit-based insurance score as an indicator of how likely you are to file a claim. Statistically, policyholders with a poor insurance-based credit score are more likely to file claims, according to the Insurance Information Institute.
Insurance companies in the following states are prohibited from using your credit score as a rating factor.
- California
- Hawaii
- Massachusetts
- Michigan
While your car insurance rate depends on multiple factors, it may be helpful to see the average cost of car insurance in each state based on your credit tier.
Annual full coverage premium by state and credit rating (excludes states that do not allow credit as a rating factor)
| Poor | Average | Good | Excellent | State Car Insurance Laws | |
|---|---|---|---|---|---|
| Alabama | $3,108 | $1,900 | $1,623 | $1,540 | Alabama car insurance laws |
| Alaska | $2,265 | $1,730 | $1,559 | $1,497 | Alaska car insurance laws |
| Arizona | $2,804 | $1,764 | $1,547 | $1,423 | Arizona car insurance laws |
| Arkansas | $3,461 | $2,146 | $1,914 | $1,660 | Arkansas car insurance laws |
| Colorado | $3,321 | $2,213 | $2,016 | $1,679 | Colorado Car Insurance Laws |
| Connecticut | $2,967 | $1,794 | $1,845 | $1,344 | Connecticut car insurance laws |
| Delaware | $2,987 | $1,954 | $1,775 | $1,509 | Delaware car insurance laws |
| Florida | $5,817 | $3,032 | $2,364 | $2,161 | Florida car insurance laws |
| Georgia | $3,143 | $2,200 | $1,982 | $1,859 | Georgia Car Insurance Laws |
| Idaho | $1,748 | $1,217 | $1,045 | $1,019 | Idaho car insurance laws |
| Illinois | $2,622 | $1,653 | $1,485 | $1,243 | Illinois Car Insurance Laws |
| Indiana | $2,621 | $1,480 | $1,254 | $1,099 | Indiana car insurance laws |
| Iowa | $2,365 | $1,408 | $1,260 | $1,087 | Iowa car insurance laws |
| Kansas | $3,165 | $1,924 | $1,698 | $1,521 | Kansas car insurance laws |
| Kentucky | $4,128 | $2,533 | $2,128 | $1,934 | Kentucky car insurance laws |
| Louisiana | $4,630 | $3,032 | $2,724 | $2,410 | Louisiana car insurance laws |
| Maine | $1,425 | $913 | $965 | $765 | Maine car insurance laws |
| Maryland | $2,935 | $1,958 | $1,877 | $1,565 | Maryland car insurance laws |
| Minnesota | $3,087 | $1,822 | $1,643 | $1,445 | Minnesota car insurance laws |
| Mississippi | $2,685 | $1,893 | $1,782 | $1,552 | Mississippi car insurance laws |
| Missouri | $2,829 | $1,865 | $1,661 | $1,463 | Missouri car insurance laws |
| Montana | $2,894 | $1,913 | $1,737 | $1,560 | Montana car insurance laws |
| Nebraska | $2,862 | $1,697 | $1,531 | $1,293 | Nebraska car insurance laws |
| Nevada | $3,275 | $2,404 | $2,245 | $2,044 | Nevada car insurance laws |
| New Hampshire | $2,174 | $1,312 | $1,275 | $945 | New Hampshire car insurance laws |
| New Jersey | $3,307 | $1,979 | $1,757 | $1,384 | New Jersey Car Insurance Laws |
| New Mexico | $2,534 | $1,560 | $1,419 | $1,300 | New Mexico car insurance laws |
| New York | $4,876 | $2,585 | $2,321 | $1,935 | New York Car Insurance Laws |
| North Carolina | $1,758 | $1,451 | $1,325 | $1,352 | North Carolina auto insurance laws |
| North Dakota | $2,388 | $1,474 | $1,264 | $1,107 | North Dakota car insurance laws |
| Ohio | $2,075 | $1,231 | $1,034 | $960 | Ohio Car Insurance Laws |
| Oklahoma | $3,024 | $2,054 | $1,873 | $1,680 | Oklahoma car insurance laws |
| Oregon | $2,288 | $1,539 | $1,346 | $1,245 | Oregon car insurance laws |
| Pennsylvania | $2,553 | $1,791 | $1,476 | $1,507 | Pennsylvania car insurance laws |
| Rhode Island | $3,090 | $2,132 | $2,018 | $1,664 | Rhode Island car insurance laws |
| South Carolina | $2,775 | $1,646 | $1,512 | $1,250 | South Carolina car insurance laws |
| South Dakota | $3,139 | $1,896 | $1,642 | $1,422 | South Dakota car insurance laws |
| Tennessee | $2,416 | $1,531 | $1,338 | $1,174 | Tennessee Car Insurance Laws |
| Texas | $3,053 | $2,106 | $1,823 | $1,663 | Texas Car Insurance Laws |
| Utah | $2,369 | $1,477 | $1,306 | $1,144 | Utah car insurance laws |
| Vermont | $1,873 | $1,209 | $1,207 | $982 | Vermont car insurance laws |
| Virginia | $2,300 | $1,425 | $1,304 | $1,083 | Virginia Car Insurance Laws |
| Washington, D.C. | $3,072 | $2,062 | $1,855 | $1,711 | Washington, D.C. car insurance laws |
| West Virginia | $2,635 | $1,741 | $1,499 | $1,355 | West Virginia car insurance laws |
| Wisconsin | $5,440 | $1,345 | $1,186 | $1,010 | Wisconsin car insurance laws |
| Wyoming | $2,357 | $1,567 | $1,495 | $1,229 | Wyoming car insurance laws |
Tips for finding competitive car insurance rates even with poor credit
If you have poor credit, you’re not alone. In fact, 16% of Americans have credit in the “poor” range, according to FICO. Even with a below-average credit score, a little research can help you find car insurance rates that fit your budget.
Here are a few tips to help you find the best car insurance for your wallet:
- Shop around with different providers: Insurance companies each use different algorithms to determine your insurance score. One company might place more weight on your credit score, while another might care more about your driving history. For this reason, different companies will typically offer you different rates. You may want to compare rates from several of the best car insurance companies before making your choice.
- Research local, independent, and minority-owned insurance agencies: Insurance agencies represent multiple providers and may be able to point you to the best insurance carrier for your individual needs. Instead of finding quotes from multiple companies on your own, an insurance agency does the work for you.
- See which discounts apply to you: Insurance companies offer various discounts and often allow you to mix and match these deals. For this reason, you may want to find the insurance company with the most discounts that apply to you.
- Talk with an independent insurance agent: Like agencies, independent insurance agents can talk with you about your needs and budgetary restrictions to help find coverage that’s right for you. They can also point you to discounts that might apply to you.
- Keep a clean driving record: Car accidents and filing claims can increase your insurance premium significantly. If you can, keeping a clean driving record is one of the best ways to keep your rates low.
- If you’re buying a new vehicle, consider its features: If you’re considering buying a new vehicle, car insurance companies often give discounts if your vehicle comes equipped with certain safety features such as anti-lock brakes and anti-theft systems.
- Work to improve your credit score: Improving your credit score may take some time, but it’s certainly possible and something you may want to consider if your state allows insurance companies to use your score as a factor. You may want to focus on catching up on any past-due payments, making future payments on time and limiting how much you apply for new credit cards or accounts.
Available resources
- Credit Reports and Scores: This government site walks you through what credit reports, credit scores and credit freezes are. It also shows you how to obtain your credit report and make corrections to it.
- How to Improve Your Credit Score: This checklist may help you learn new ways to improve your credit score.
- Credit Repair: This government site walks you through your rights regarding personal debt and credit and gives you resources to understand and get help with credit repair.
- Credit Counseling: This site helps those living paycheck to paycheck find a credit counselor that can help them improve their credit.
- Managing Your Credit: Bankrate’s tools can help you manage your credit, from showing you how to generate a building your credit to
- Independent Insurance Agencies: This Insurance Directory provides a list of State Insurance Organizations.
- Government Resources and Assistance: This site provides resources, including information about unemployment insurance.
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