The same dynamic is playing out across the country. Only California, Hawaii and Massachusetts prohibit insurers from using drivers’ creditworthiness to set premiums. Anywhere else, low credit is likely to increase your car insurance price, and your zip code could multiply the damage. (Insurers use a special “credit-based insurance score” for pricing, but it’s calculated in a very similar way to your regular credit score.)
Insurance companies say they should be allowed to use credit ratings and zip codes to price insurance because these factors help them gauge how risky insuring a driver will be.
“Over the years, studies have shown that drivers with lower credit-based insurance values have higher losses and drivers with higher credit-based insurance values have lower losses,” says Jeffery Brewer, vice president of public affairs at the American Property Casualty Insurance Association, which advocates for the industry .
And a driver’s zip code can indicate whether an insurer should expect more claims from traffic accidents, vandalism or theft, according to Michael Barry, a spokesman for the Insurance Information Institute, a trade association.
The law prohibits insurers from using race and income to set auto insurance premiums or decide who to insure. But critics say that factors like credit ratings and zip codes can have a particularly big impact on certain racial groups.
For example, Black, Hispanic, and Indigenous Americans are far more likely to have bad credit than white Americans, a reflection of decades of discriminatory policies, including redlining, that have provided limited opportunities for communities of color to build wealth.
This results in a double whammy for drivers of color. “When you combine credit and territorial pricing, you get a disastrous result,” says Heller. “There is a credit penalty intensification in most non-white zip codes.”
Another potential problem with relying on an individual’s credit information is that it often contains errors significant enough to adversely affect a financial decision about them. In 2021, CR asked nearly 6,000 volunteers to review their credit reports, and one in three found at least one error.
But Brewer argues it’s less fair to bar the use of data like credit scores, which provide insight into a driver’s likelihood of making a claim. He says if insurers can’t predict risk using this type of data, drivers who are less likely to make expensive claims could potentially overpay for insurance and subsidize riskier customers.
Curbing the use of non-driving factors has long been a goal of consumer advocates, who argue they have the potential to unfairly penalize safe drivers for circumstances beyond their control. In addition to credit reports and zip codes, companies often calculate insurance rates based on driver education, job title, gender, and marital status.
In 2021, CR examined two of those factors: education and job title. We found that drivers with lower degrees or lower-paying jobs received significantly higher auto insurance premiums than drivers with higher education or higher job titles.
Taken together, these factors can create a burden for drivers. Imagine someone who works as a teller and didn’t go to high school, has low credit, and lives in a predominantly black zip code. Each of these facts can increase their insurance premiums, although none of them have anything to do with how safe a driver they have is.
In some cases, the price of a low credit score can be so extreme that it can even outweigh the hefty penalty of a drunk driving charge. In 2015, Consumer Reports found that a driver in Florida with clean driving and poor credit was charged $1,552 more than an identical driver with excellent credit and a DUI.
Proponents would prefer companies to only rely on information about your driving behavior, such as: B. past collisions and speeding tickets, along with factors like your own car, how long you’ve had a driver’s license and how many miles you drive each year.
