The Surprising Reason You’re Paying So Much for Car Insurance

Understanding why you pay what you do for car insurance can be a bit of a mystery. Insurers throw all sorts of variables in the mix, from your age to where you live to what kind of car you drive. Often, they also factor in your credit — and it’s way more important than you probably think.

A new study conducted by WalletHub.com finds that have excellent credit versus no credit history creates, on average, a 65% variation in the cost of premiums when all other factors are the same.

In some cases, the discrepancy can be even greater. “Allstate appears to be the company that relies on credit data the most, with the WalletHub Scenario revealing a 116% fluctuation in premiums,” the study says. By comparison, State Farm showed the least amount of variation, although there still was a 45% difference.
Geography matters, too. In Vermont, credit only makes a 18% difference in premium prices, but it accounts for a whopping 126% fluctuation in Washington, D.C.

In Massachusetts, California and Hawaii, there’s no difference; these three states have laws that prohibit insurers from using credit information in car insurance pricing.

WalletHub looked at Allstate, State Farm, Geico, Progressive and Farmer’s Insurance for its study. The site got quotes for two hypothetical customers whose information was identical except for their credit information: One was assigned excellent credit and the other was given no credit history.

One thing that can be frustrating for drivers is that it’s not always easy to figure out how much your credit factors into the quote you get from an insurance company. WalletHub looked at the websites of the 10 biggest car insurance companies to see how easy it is for people to find out if the company is using their credit data and which credit reporting agency they’re getting the information from.

It found wide variations in how and how much companies disclose about the way they use customers’ credit data. Progressive came out on top in this analysis with a perfect score of 10, followed by Farmer’s Insurance and American Family Mutual with scores of 9 and 8, respectively. Liberty Mutual was the least transparent with a score of 4.5.

Consumer advocates say it’s important for drivers to know their rights when it comes to the way insurers use their credit information. “The federal Fair Credit Reporting Act (FCRA) Adverse Action Notification…. requires any user of a credit report to notify the consumer if the use of that report resulted in an adverse action, which, in the case of insurance, would be denial of coverage or a higher premium than a consumer with an average or higher insurance credit score,” says watchdog group United Policyholders.