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Should car insurers use your credit score to drive up coverage costs?

How bad credit impacts major purchases
Eye on Money: How bad credit can impact major purchases 04:38
  • Most drivers don't know that credit scores usually factor into their insurance premiums.
  • Drivers with poor credit scores can pay twice what those with excellent scores pay.
  • But studies don't agree about whether prohibiting insurers from using credit scores would lead to lower premiums overall.

As Michigan becomes the fourth state to eliminate using credit scores as a reason to raise or lower car insurance rates, a debate is raging as to whether this will help or hurt the state's drivers. Car owners in Michigan -- once headquarters for the three major American automakers -- now pay up to $6,000 to get behind the wheel. The answer to the debate, according to two studies, is that eliminating credit scoring will help some drivers … but hurt others.

A national study by the insurance-quote website Zebra, based on ZIP codes across the country, found that drivers with poor credit -- defined as below 580 -- shell out about double what drivers with exceptional credit of 800 or above pay, said Alyssa Connolly, Zebra's director of market Insights. About 20% of drivers make the cut. She was unsure about how many drivers were in the bottom tier.

But a contrary study by the Mackinac Center claims that preventing auto insurers from using credit ratings "will not produce overall savings in the auto insurance market," according to study author Michael Van Beek. The only result would be that "some consumers pay more so that other consumers can pay less." And it may also make the market less competitive. Most states allow credit scoring in other forms of insurance, such as home, life and even pet coverage, said Van Beek.

How to get your credit in good shape 04:12

Three other states -- California, Hawaii and Massachusetts -- have so far banned insurers from using credit scores, while most others allow it. Insurers say this lowers costs for 50% of policyholders, according to  Loretta Worters, vice president and spokesperson at the Insurance Information Institute, which represents most auto insurers. Worters said those with low credit scores are more likely to file claims, and since insurers have to pay these claims, they need to charge more. A 2007 Federal Trade Commission study acknowledged this. 

But Zebra's Connolly argues that the jury is out on that. While California, which banned using credit scores, has high premiums, Hawaii, which also banned the practice, ranks in the bottom 10. Connolly also noted that most drivers, nearly 60%, don't even know their credit scores are factored into car insurance rates.

"No golden ticket"

Compelling car insurers to be blind to credit scores and other "nondriving factors" is unlikely to help Michigan drivers very much, said Connolly. The state has been suffering from an insurance plan that offers "unlimited personal injury protection" in the event of an accident.

"It costs a ton of money and has led to extensive fraud," she added. The auto insurance reform package just signed by Michigan Gov. Gretchen Whitmer would also limit personal injury protection. "But there is no golden ticket for lowering rates," Connolly warned. And that's probably true for the other 49 states as well.

If you're a safe driver with poor credit, Connolly suggests that you:

  • Explore telematics (which report driving behavior back to insurers) and usage-based insurance, which gives the insurer a window into how, and how much, you drive.
  • Check with other insurers. Your current carrier may not have the most updated information on your credit rating, and some insurers don't use it at all.
  • Improve your credit score, since a better score can mean better insurance rates. Watch the videos above to learn how. 
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