If you’re wondering why your insurance rates on your car and home are going up, it’s because your credit score may be going down. Your credit score determines a lot of things that happen in your life from obtaining a home loan, an apartment, being awarded credit, and even getting insurance. According to Wallethub.com Florida residents with poor credit scores can pay up to 43 percent more for auto insurance than those who have better credit. This has nothing to do with your driving record, the type of car you drive, or even if you live in an area with high property crime rates. Fairly or unfairly, insurance companies use credit scores to target risk.
Beginning in the early 1990s, insurance companies began using elements of credit reports to protect the odds of a given consumer having an insurance loss. Currently 95 percent of auto insurance companies and 85 percent of homeowners insurance companies use credit based scores in states where it is allowed. Companies take a look at payment history (40 percent of score), current debt (30 percent of score), credit history length (15 percent of score), lines of new credit that you have opened (10 percent of score), and the types of credit that you have such as student loans, credit cards, mortgage, and auto loans (five percent of score). Essentially, as Consumer Reports explains, you’re having to pay premiums for accidents that you haven’t had yet and that may never happen.
The FTC noted in 2007, that credit scoring raised auto coverage rates for African-Americans and Hispanics, even when those drivers had pristine driving records, and the National Consumer Law Center notes that such practices perpetuate discrimination. While one may argue that this is not purposeful discrimination, but the use of an algorithm to predict risk of loss, the effect is indisputably one of discrimination. African-Americans and Hispanics are often employed in lower wage jobs, live in higher crime areas, and may not have access to local banking services. Even though the Fair Credit Reporting Act entitles people to a free annual credit report from Experian, Equifax, and Trans Union, there may still be inaccurate, or outdated information contained in the report. At present, only California, Hawaii, and Massachusetts specifically prohibit insurers from using individual credit scores to determine premiums.
The advice for improving your credit score remains the same.
- Pay your bills on time.
- Reduce your ratio of debt to credit.
- Diversify your debt.
- Don’t apply for too many new types of credit.
- Build a strong credit history.
While it is encouraging that the FTC and federal government support equal credit opportunity rights, the reality is that discrimination is still an integral part of the system. Furthermore, credit repair scams are disproportionately targeted at the poor and communities of color where banking services and financial education are not readily available. If you suspect that a poor credit rating is interfering with your ability to obtain affordable insurance, please give us a call. We will help you to find a company that will weigh your credit record less than your driving record.