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Can Poor Credit Affect Car Insurance?

These days, there is a credit score for just about everything. That includes car insurance. While FICO is the most common generalized score, a number of specially tailored scores have been developed by FICO, credit reporting agencies, and other aggregators of consumer behavioral information for everything from opening a bank account to renting an apartment. One of the first specialty credit scores was developed for the car insurance industry in the 1990s. Since then, most car insurance companies take consumer credit report into consideration when offering rates. This article will explain how poor credit can affect car insurance quotes.

Most of us are familiar with issues that have an impact on our total car insurance quotes. By and large, these all make sense. Young adults have very limited driving experience. A more expensive car will cost more to repair or replace. A heavier vehicle will cause comparatively more damage in an accident. Sports cars tend to be driven more aggressively. A driver that caused an accident is more likely to cause another accident in the future. But when insurance companies incorporated consumer credit scores into their underwriting and pricing processes, it caused consumers and regulators to question how poor credit can affect car insurance quotes.

This issue has been studied by researchers at the University of Texas and the Federal Trade Commission. The University of Texas study, published in 2003, found a key relationship: those with the worst credit, the bottom 10%, had loss rates that were more than 1.5 times higher than average, and twice as high as those in the top 10% of credit scores.

The Federal Trade Commission study was published in 2007. This study was unusual in the sense that Congress directed the FTC to study how poor credit can affect car insurance rates in Section 215 of the Fair and Accurate Credit Transactions Act (FACTA). In the end, the conclusion was the same: credit scores are effective predictors of risk, in terms of both the number of future claims files and the total cost for each claim.

For consumers with poor credit scores, this seems greatly unfair. How is it that they can be prejudged by an insurance company for a factor that seemingly has nothing to do with the propensity to cause an accident? This paradox has even led consumer-friendly California, Hawaii, and Massachusetts to ban the use of credit scores by auto insurers. Similarly, Maryland allows the use of credit report information under very specific guidelines, which includes prohibiting insurers from rejecting applicants based on credit scores.

Moreover, the 2008 financial crisis caused credit scores to plummet for millions. Surely, this did not make those who lost their jobs and homes worse drivers? Interestingly, the data suggests otherwise. The total number of miles driven has stayed relatively constant from 2005 - 2014, at approximately 3 trillion vehicle miles, according to the Federal Highway Administration. Given the constant improvement in safety features in cars, the natural assumption would be that, if we are driving the same miles, and traffic laws haven't changed, then the total accident rate should be falling. However, the accident rate has been rising steadily in the past few years and so has auto insurance, from 5.34 million police-reported accidents in 2011 to 6.1 million police-reported accidents in 2014 according to the National Highway Traffic Safety Administration.

It is possible that there is a simple explanation for how credit scores correlate with increased accident risk. We all know that people with the lowest credit scores have the toughest time paying their bills. If bills are going unpaid, then most likely car maintenance is suffering as well. Most wear components on cars are critical to safety, especially tires, brakes, and windshield-wiper blades. A car with bald tires and worn brakes requires increased stopping distance. Worn-out wiper blades and lack of windshield wiper fluid can create a serious visibility hazard in wet or icy conditions.

In sum, the best thing that you can do to pay low auto insurance rates is to be responsible with both your use of credit and the care of your car. Keep them both in good working order. Your car will be much safer taking you back and forth to work on a good set of tires and properly maintained brakes. There are certainly countless reasons to keep your credit scores high as well. Your credit report and a driving record with no accidents or tickets are the factors that are the easiest to control and are proven money savers.