Gianetta Palmer is a writer for, copywriter, and essayist. Her work has appeared in, Healthline, and The Dyrt Magazine. She is the author of Scrunchie-Fried and writes a lot about car insurance in her spare time.

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Melanie Musson is the fourth generation in her family to work in the insurance industry. She grew up with insurance talk as part of her everyday conversation and has studied to gain an in-depth knowledge of state-specific car insurance laws and dynamics as well as a broad understanding of how insurance fits into every person’s life, from budgets to coverage levels. She also specializes in automa...

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Reviewed by Melanie Musson
Published Insurance Expert

UPDATED: Mar 13, 2020

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A person’s driving history isn’t the only thing that insurance companies base rates upon. Some things that factor into an insurance quote are completely outside of the driver’s control. Location, type of vehicle, gender and marital status all affect premiums. In most states, insurers also assess the insured’s credit score. A bill has recently been proposed to stop this practice, although it may not be passed. The issue has come up numerous times at a state level and has nearly always been denied, so a federal regulations may not work either.

Nevertheless, many people believe that the use of credit scores in determining insurance rates is unfair and discriminatory. Some insurance companies place a higher importance on credit scores than others; for these companies, it can be difficult to get a policy at all if you have bad credit. Most insurers do charge higher premiums to people with poor credit than those with good credit even if the insureds are equally safe drivers.

Why Do Insurance Companies Base Rates on Credit Scores?

Insurance companies rely on statistics to predict the risk factors of their drivers. A person with a preexisting history of auto accidents has a higher chance of being in more, but people who are statistically likely to have accidents still have a high risk even if they haven’t had an accident yet. In other words, insurance companies aren’t willing to take a risk on someone who is likely to file a claim, even if that person hasn’t had an accident yet.

Statistically, people with poor credit file more insurance claims than people with good credit. There are several reasons why this could happen. Many people with bad credit also have little disposable income, which means they have less money to use for car repairs. This means that they will be more likely to file claims for minor accidents rather than covering the cost of repairs out of pocket.

People with bad credit may also be seen as financially irresponsible, which might make an insurance company reluctant to accept them as customers. If a person has bad credit, they may not pay their bill on time, which leads to lost profits and hassles on the part of the insurer. In this regard, insurance companies are the same as landlords and financing companies: They don’t want customers that won’t pay their bills.

Is It Unfair to Base Rates on Credit Scores?

On one hand, charging higher rates to people who are likely to file claims makes good financial sense. An insurance company must recover the money it spends on claims somehow, and compensating for claims by charging high-risk drivers is the way companies keep costs low for safe drivers. Therefore, it stands to reason that if drivers with bad credit file a lot of claims, they should pay more for insurance.

There is a problem with this model, however, because people with low incomes will have a hard time paying the higher cost of insurance coverage. These drivers may then choose to stop carrying insurance altogether or carry only minimal coverage. These uninsured or under-insured motorists could lead to an increase in the overall cost of insurance in an area.

This is the reasoning behind the proposed bill to stop insurance companies from discriminating on basis of credit. Although still in fledgling stages, this bill could affect many people. If it doesn’t get passed, insureds will need to continue searching for an insurance company that will provide low-cost coverage as they do now. Fortunately, most insurance companies care less about credit than they do about safe driving, so good drivers should always be able to save money on car insurance.

If you have bad credit, you can find an insurance company that will offer you reasonable rates by doing some research. Be advised that the initial quote you receive online may not be wholly accurate. The final price of your insurance premiums might be higher once the insurance company has run a credit check on you, and this only happens after you request the initial quote. Be sure to ask the insurer about your final premiums before agreeing to the policy.

By doing your research in advance and getting multiple quotes from different companies, you can be sure to get the best possible rates no matter what kind of credit you have. You should also be sure to take advantage of discount programs and other methods of reducing your rates to ensure that your premiums stay as low as possible even if insurance companies continue basing premiums on credit scores.