When most people think of car insurance premiums, they assume those costs are determined by their age (younger drivers are more likely to have accidents), by their driving record (people who have multiple accidents are bigger risks), and by the amount of coverage they choose (you pay more to get more protection). Other factors like your marital status, gender, and even high school or college grade point average can affect your rates. But did you know your credit score could, too?
Since the mid-1990?s, a growing number of auto insurance companies have begun using your credit score to determine what you should pay in premiums for the coverage you want. Based on studies conducted for the insurance industry, a link exists between your credit score and the likelihood that you will have an accident so the lower the score, the bigger risk you pose to the insurer, and the more you pay in premiums.
If you want to find a car insurance company that doesn?t base your premiums, in part, on your credit score, good luck. All fifteen of the largest companies do it. Most states also allow the practice: only Hawaii, California, and Massachusetts do not. However, your credit score cannot be the sole basis for your premiums under most state and federal regulations of the practice. That might not be much consolation if you?ve had a foreclosure, medical bills you couldn?t pay, or other financial problems. The last thing you want to do is pay higher insurance premiums, too.
For that reason, two House representatives proposed the Ban the Use of Credit Scores in Auto Insurance Act in early July 2012. If made a law, the act would end the use of credit scores as a factor in determining your car insurance premiums. The representatives, both of whom are from Michigan, point out that the recession has hit many people?s credit scores hard, especially in their state which can boast both the highest rates of unemployment and the highest insurance premiums in the nation.
Part of their complaint about the practice is that instead of basing premiums on a person?s actual driving ability or responsibility on the road, insurance companies are looking at how likely they are to get paid instead.
Similar laws have been introduced in many states but most are killed off in committees. The bills are strongly opposed by the insurance industry who stand by their claim that credit scores help them estimate risk more accurately thus keeping premiums lower for low risk drivers and putting more of the burden on those most likely to file an insurance claim. On the other hand, opponents of the practice say it hurts low income and minority drivers and does not take into account the large number of mistakes on credit reports that take time to correct.
What will happen to this bill at the federal level remains to be seen, but either way the outcome will impact how much you pay for auto insurance.
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