Your credit score could be driving up your car-insurance premium, study says

Statewide, New Yorkers with clean driving records and excellent credit to match pay a weighted average annual premium of $730, found a report from the Consumer Federation of America published this week. Meanwhile, people with similarly good driving records and fair credit pay an average premium of $1,148, and those with poor credit pay $2,097. 

That pricing model poses a particular burden on Black and Latino drivers — who, apart from being more likely to have worse credit due to a history of discriminatory lending policies, are also more likely to live in the ZIP codes where insurers charge higher premiums, according to the report.

It’s a “double whammy” that costs some drivers living in predominantly Black and Latino communities thousands of dollars extra for basic auto-insurance coverage each year compared to people living in predominantly white communities, the report said. 

“People have poor credit for a lot of reasons — including medical crises, job losses, poverty, and the legacy and persistence of systemic bias in financial services — and the price they pay for mandatory auto insurance should not be impacted by their credit history,” Michael DeLong, the Consumer Federation of America’s research and advocacy associate, said in a statement Wednesday. 

For example, a good driver living in Brooklyn, a New York City borough where nearly half the residents are Black or Latino, might pay $1,861 in average insurance premiums each year if they have excellent credit, and $5,971 if they have poor credit, according to the report. The disparity exists outside of New York City, too: In Buffalo, the average premium for a driver with excellent credit is $826, compared to the average premium of $1,292 for drivers with fair credit and $2,259 for drivers with poor credit. A third of Buffalo’s residents are Black.

When analyzing disparities by ZIP code across the state, the report authors also found drivers in majority-white communities with excellent credit pay an average of $647 in auto-insurance premiums, while those with poor credit pay $1,803. In majority-Black ZIP codes, meanwhile, drivers with excellent credit pay $1,564 in premiums, and $4,975 if they have poor credit. Drivers in majority-Latino communities are slightly worse off: They pay $1,573 in auto premiums if they have excellent credit, and $5,042 if they have poor credit.

Disparities persist beyond New York

There’s evidence this price gap extends far beyond New York state.

Take Michigan, the heart of the U.S. car industry and one of the most expensive states for auto insurance: Researchers from Poverty Solutions at the University of Michigan said in 2019 that drivers in Detroit, a city that’s about 78% Black, faced average annual auto-insurance premiums of $5,414, meaning households there were forced to spend about 18% of the area’s median household pre-tax income on car insurance. 

Though a multitude of factors fueled those ultra-high costs — including the state’s requirement that drivers carry unlimited coverage for personal-injury protection, which puts the onus on insurers to cover potentially high amounts of medical damages related to accidents — the reality of insurance companies using non-driving factors like credit scores to price insurance premiums was also to blame, the University of Michigan researchers said.

“This is a big problem for Detroit residents, who collectively have some of the lowest credit scores in the country,” they wrote in their paper. “Thus, a single mother in Detroit with a perfect driving record but bad credit could be charged one of the highest auto insurance premiums of any person in the entire country, despite never having been cited for a traffic violation or having been a part of a traffic accident.”

The state reformed its auto-insurance laws in 2019 to get rid of automatic unlimited personal-injury-protection coverage, allowing consumers to choose their medical-coverage limit. It also restricted insurance companies from using factors like a driver’s credit score and ZIP code when setting rates, though insurers can still create insurance scores that incorporate “territory” and credit history, according to Poverty Solutions.

In New York state, Assembly Majority Leader Crystal Peoples-Stokes has introduced legislation to block insurers from using drivers’ credit history to set auto-insurance rates — a reform she has rallied behind for several years. New York remains among the 47 states that allow credit information to be used in auto-insurance pricing and underwriting, according to the Consumer Federation of America. The District of Columbia also allows the model, which has so far been prohibited only in California, Hawaii and Massachusetts. 

“Using socioeconomic and non-driving factors that are not inherently related to a person’s ability to operate a car safely forces good drivers who are of lower socioeconomic status to pay more for our state’s obligatory auto insurance,” Peoples-Stokes said in a statement Wednesday. “I am deeply concerned that the use of credit history is having a highly negative impact on low and moderate income drivers, especially Black and Latino drivers who live in neighborhoods where auto insurance is already very expensive.”

The Consumer Federation of America, which supports Peoples-Stokes’ proposal and said there are other means of reflecting regional risk differences, is calling on state officials to get behind unwinding what it called “the legacy of redlining on New York drivers.” Officials should ban auto insurers from using customer credit history in the underwriting and pricing of their products, and require insurers to reconfigure rating algorithms in a way that is based more on driving safety and other “driving related characteristics,” the organization said in its report. 

The report also cited a 2015 Consumer Reports study that found New York drivers with poor credit and a clean driving record still pay almost $600 more on average than drivers with excellent credit and a conviction of drunk driving. 

“It is illogical and deeply unfair for auto insurers to impose a greater surcharge on a policyholder for poor credit than is imposed on a customer with a drunk driving conviction on their record,” the Consumer Federation of America report said.

Does credit information predict accidents?

Credit scores are largely based on payment history, credit utilization and outstanding debts. 

Though credit-reporting agencies are working to incorporate factors like rental payments and streaming-service payments, which could help improve lower-income consumers’ credit scores, scoring models have nonetheless been accused of perpetuating racial discrimination by gatekeeping future opportunities based on consumers’ past financial history.

From the archives (2022): Fannie Mae launches pilot program to include on-time rent payments in credit reports. That could be a game changer for renters. Here’s why.

Because Black and Latino families on average have less wealth, earn less money, and are more likely to be unbanked or underbanked than their white peers, for example, it can be more difficult for them to get access to financial products that would help them establish solid credit records — creating a cycle in which those who need credit history to access affordable loans can’t get such loans to build their credit history. 

Auto-insurance “pricing should not be a means of segmenting consumers according to social and economic status and it should not be disproportionately harmful to consumers based on protected classes such as race, income, and gender,” the Consumer Federation of America report said. “Though used by many if not most insurers, credit information does not meet these critical tests.”

MarketWatch reached out to representatives for some of the country’s largest auto insurers for comment on the report, but didn’t immediately hear back. 

However, the insurance company Progressive says on its website that “credit information is very predictive of future accidents or insurance claims,” making it useful for developing rates and insurance scores. The company notes that insurance scores differ from credit scores, though the “credit factors” that negatively affect premiums — late payments, higher credit utilization, debt in collections — also tend to drive credit scores lower. 

Allstate similarly says on its website that such insurance scores, “based on elements from your credit history,” can help predict losses.

“Allstate understands that people sometimes face difficult circumstances, such as job loss, divorce, or large medical bills,” the company says on a webpage describing its use of credit information. “We consider many factors when determining an insurance score, so a single negative event does not necessarily mean you will get a higher than average premium. It’s possible that a negative event, such as a delinquency, may be offset by other positive factors like a long credit history.”

The Consumer Federation of America, for its part, said that despite insurers alleging a “correlation between customers’ credit and the likelihood of a claim, no one suggests it speaks to an individual driver’s actual safety on the road.” 

“Furthermore, the overwhelming burden that its use disproportionately places on financially vulnerable and historically underserved residents of New York must be recognized and addressed,” the report said.