Why Do Drivers in Credit Check States Pay More for Car Insurance?

Jane Lu
· 3 min read
Your driving history, where you live, and your age are all common factors that will impact your
car insurance
rates. In many states, your provider will also consider your credit score.
Currently, the only states that don’t allow insurance companies to use
credit scores to determine premiums
include California, Maryland, Michigan, Massachusetts, Oregon, and Utah.
analyzed over 1 million points of driver data from July 2020 to July 2021 and found that credit checks typically result in higher premiums across all income levels. Jerry also examines the reasoning behind using credit checks to evaluate driver risk.
Does your state allow companies to look up credit scores to help determine insurance rates?

How do credit checks impact car insurance premiums?

According to our Jerry data, every income bracket is negatively impacted by credit checks and pay at least 10% more in states that allow them.
Jerry defined three income groups including low income, middle income, and upper-middle income. Low-income groups have a household income of $53,413 or less per year and middle-income groups earn $53,414 to $106,827 per year. Upper-middle income was defined as a household income of $106,828 to $373,894 per year.
For low-income individuals, credit checks add up to $30 a month more to their insurance premiums. Middle-income individuals see an increase of about $28, and upper-middle-income individuals pay around $17 more per month.
Credit checks also consistently impact men’s insurance premiums more than women’s. A low-income male driver will pay 15% more per month in a credit-check allowed state versus a no credit check state. On the other hand, a low-income female driver will pay 13.3% more in a credit check state.
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How are credit scores calculated?

Just like your car insurance premiums, a lot of factors go into determining your credit score. Your credit score measures how well you manage your money, not how much money you have.
The most common credit score is from Fair Isaac Corporation which considers five criteria. This includes the amount you owe on credit, your payment history, new credit products, the mix of different credit products, and the length of your credit history. You will receive a score from 300 to 850 based on these criteria.
A score of 649 is considered poor credit. To insurance companies, a
better credit score
means you’re less likely to file a claim. Since some states aren’t allowed to consider credit scores, those drivers tend to pay less for car insurance.

Is credit history a good indicator of driver risk?

In credit check states, car insurance companies will use your credit score to determine your risk as a driver. Some studies show that drivers with a lower credit score are more likely to be involved in accidents.
Every insurance company will use a different equation and weigh factors differently when they determine your rates. Many people believe that it’s not fair for credit scores to impact your premiums. That’s why many states are working to ban this practice.
It’s important to note that low-income drivers are the most heavily impacted by credit checks, and this doesn’t necessarily mean they’re riskier drivers. More research is being done into how individuals in poor communities and minorities are more likely to be pulled over in a traffic stop.
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