By Kaveh Waddell
In New York, drivers with clean driving records but low credit scores are quoted $1,367 more for auto insurance, on average, than the same drivers with excellent credit, according to a new analysis of tens of miles of car insurance quotes.
For drivers in ZIP codes with predominantly African-American residents, the gap widens even further: The cost of bad credit in those ZIP codes is $3,411 a year, on average.
These disparities are needed in a study of nearly 100,000 insurance quotes from the top 10 New York auto insurers. It was done by the Consumer Federation of America, a nonprofit advocacy organization.
The results show how much car insurance premiums can be inflated by factors not directly related to the safety of a driver’s behavior on the road. They also reveal how a driver’s credit score can influence their ZIP code to increase the cost of auto insurance, which is required for drivers in nearly every state.
“We’re talking experienced drivers with no history of car accidents or tickets facing premiums hundreds or sometimes miles of dollars more, just because of what shows up on their credit reports,” says Doug Heller, the insurance expert at the Consumer Federation of America, CFA, which led this new study. “This is unequivocally damaging to the people of New York,” he adds.
The same dynamic is playing out across the country. Only California, Massachusetts, and Hawaii prohibit insurers from using drivers’ credit scores to set premiums; elsewhere, a low credit score will likely result in your insurance prices, and your ZIP code could multiply the cost. (Insurers use a “credit-based insurance score” for pricing, but it is calculated much like your normal credit score.)
Insurance companies say they should be allowed to use credit scores and zip codes to price insurance because these factors help them estimate how risky it will be to insure a driver.
“Over the years, studies have shown that drivers with lower credit-based insurance scores have higher losses and those with higher credit-based insurance scores have lower losses,” he said. Jeffery Brewer, vice president of public affairs for the American Property and Casualty Insurance Association.
Also, a driver’s ZIP code can indicate whether an insurer should expect more claims due to traffic collisions, vandalism or theft, according to Michael Barry, a spokesman for the Insurance Information Institute, a trade association.
By law, insurers can’t use race and income to set premiums or decide who to insure, but critics say factors like ZIP code and credit score can have particularly large effects on certain racial groups.
For example, Black, Latino, and Native Americans are much more likely to have poor credit than white Americans, a reflection of decades of discriminatory policies, including redlining, that have limited opportunities for communities of color to build wealth.
Which is a double whammy for drivers of color. “When you commit to territorial credit and pricing, you get a disastrous result,” says Heller. “There is an amplification of the credit penalty in most non-white ZIP codes,” he says.
Another potential problem with relying on a person’s credit information is that it often includes errors substantial enough to negatively affect a financial decision about them: In 2021, CR asked nearly 6,000 volunteers to check their credit reports, and one in every three found at least one bug.
But Brewer argues that it is less fair to prohibit the use of data such as credit scores, which offer a window into the likelihood that a driver will file a claim. He says that if insurers can’t predict risk using that kind of data, drivers who are less likely to file expensive claims could end up overpaying for insurance and subsidizing riskier customers.
Curbing the use of non-driving factors by insurers has long been a goal of consumer advocates, who argue that these factors have the potential to unfairly penalize safe drivers for circumstances beyond their control. . In addition to credit and ZIP codes, companies often price insurance based on drivers’ education, job title, gender and marital status.
In 2021, CR investigated two of these factors: education and job title. We found that drivers with fewer titles or lower paying jobs were quoted significantly higher premiums than those with more education or higher job titles.
Together, these factors can create a huge burden for drivers. Imagine a driver who works as a cashier and didn’t go to high school, has a low credit score, and lives in a ZIP code with mostly black residents. Each of those biographical facts can increase independently of your insurance premiums, although none of them has to do with the drivers’ own safety.
In some cases, the price of a low credit score can be so extreme that it can even exceed the hefty fine of a drunk driving charge. In 2015, Consumer Reports found that a Florida driver with a clean driving record and bad credit was charged $1,552 more than a comparable driver with excellent credit and a DUI. , for its acronym in English).
Ombudsmen would prefer companies to rely solely on information about behavior on the road, such as collisions and speeding tickets, along with factors such as what car you own, how long your license is held, and how many miles you drive each year.
Are changes coming?
At this time, a backlash is starting in New York against the use of insurance factors that are not related to driving itself.
It began to gain traction in 2017, when the state Department of Financial Services imposed a new rule requiring companies to show that using a driver’s work and education to set their premiums is not discriminatory. Within months, all major auto insurers stopped using both factors in New York.
Last year, the same regulator asked insurers some tough questions about how to use credit ratings to set premiums. He asked them to show how risky it is to insure drivers with high, medium and low credit scores, and whether they’ve looked at the relationship between credit score and income, a rating factor insurers can’t use. Company responses are confidential.
And this year, New York Assembly Majority Leader Crystal Peoples-Stokes reintroduced a bill she has supported since 2015 that would ban the use of any socioeconomic factor to determine premiums and terms of coverage. The exclusion would cover credit score, age, gender, marital status, sexual orientation, job, education, and other factors.
“The use of socioeconomic and non-driving factors that have nothing to do with a person’s ability to safely operate a car forces good drivers of lower socioeconomic status to pay more for mandatory auto insurance. our State,” Peoples-Stokes wrote in a statement detailing this law.
If passed, “this bill has a significant impact on our clients,” says Neha Karambelkar, an attorney with the Western New York Law Center, a legal aid organization in Buffalo, New York. “If you take your credit score out of the equation, you might be able to access affordable auto insurance. That has a huge and far-reaching impact in many low-income communities and Black and Latino communities.”
Other states are considering taking similar steps. In Nevada, there is a pandemic-related ban on credit-based rate increases in effect through 2024. New Jersey, Oregon, and Rhode Island are among the other states that are placing limits on how insurers can use credit information.
Are you paying too much for your car insurance?
Send a letter to New York lawmakers to end auto insurance discrimination.
What you can do
If you live in a state where insurers can use your credit score and ZIP code, and you think poor credit could be inflating your premiums, shop around. You may find a different insurer that weighs credit pressures less in its pricing algorithm.
Depending on where you live, you may be able to find an insured that ignores credit scores entirely. CURE, a nonprofit insurer serving drivers in New Jersey, Pennsylvania, and Michigan, doesn’t look at credit scores at all; Root, which is available in 34 states, says it will stop using credit scores by 2025.
You can also follow CR’s general advice to reduce your insurance costs. One suggestion is to consider telematics programs that promise discounts for safe drivers who agree to install an app or device that tracks their driving characteristics, such as speeding and hard braking. But you should be aware of privacy issues and consider whether you’re willing to share your location and driving details with your policyholder.
You can also take a close look at your credit report to make sure there are no errors. Check the three main bureaus: Equifax, Experian, and TransUnion, because an error on one report doesn’t always show up on the others. Until the end of 2023 , you are entitled to one free report per week at annualcreditreport.com.
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