Doug Heller is a consumer advocate and insurance expert who works with the Consumer Federation of America. On Twitter @DougHeller.
It is not surprising that someone who collects speeding tickets like baseball cards would face high auto insurance premiums. After all, insurance prices are meant to relate to the risk of loss associated with the policyholder and, also, to signal to drivers the value of safe driving.
What is shocking, however, is the impact that insurance companies’ use of credit scores has on auto insurance premiums in Illinois and many other states. In fact, a 2013 study by Consumer Federation of America found, for example, that State Farm raised the premiums of a customer with a perfect driving record by more than a third if her credit score was average instead of excellent, and by a whopping 123 percent if her credit score was poor rather than excellent. In other words, drivers who have never caused an accident or received a citation might pay more than double the premium paid by drivers with the same record but a better credit score.
That's a lot of money.
Even worse, insurance companies have come to place so much weight on credit scores that the impact of driving safety records is greatly diminished. Consumer Reports took a deep dive into this issue last summer and found that, in many states, several insurance companies actually charged a driver with a perfect record but a low credit score more than a customer with a DUI on his record but great credit. In Illinois, the tally was 51 percent higher premiums for good drivers than for convicted drunk drivers - $861 more a year on average - all because of credit scores.
This pricing scheme, without any further information, is bad enough. And Americans instinctively know it, with over two-thirds calling the use of credit scoring for auto insurance pricing “unfair” in a poll conducted for Consumer Federation of America. But there is more to the story than j the fact that use of credit scores by insurers is unfair.
As a 2010 study by Woodstock Institute revealed (as have studies by the Missouri Department of Insurance, Texas Department of Insurance and Federal Trade Commission), credit scores are strongly correlated with race. In fact, the Woodstock Institute study showed that 54.2 percent of residents in predominantly African American zip codes in Illinois had low-credit scores, while only about 16.8 percent of residents in predominantly white Illinois communities had low credit scores. Latino communities also showed above average (31.4 percent) numbers of residents with low credit scores.
With the well-documented correlation of income and race, it is clear that the use of credit scoring in auto insurance pricing increases premiums for those least able to afford it. And that contributes to high levels of uninsured motorists – an estimated 13 percent of drivers in Illinois are on the road without any coverage – a problem that impacts everyone on the road.
The Woodstock Institute study also found that a credit score disparity exists between drivers living in large metropolitan zip codes of Illinois and those living outside of the largest metro regions. That is important because drivers in Illinois’ biggest cities are already paying higher premiums than residents in rural and suburban Illinois. So the credit score punch essentially hits them twice.
To address this unfair practice, State Senator Jacqueline Collins of Chicago introduced legislation (SB 2208) earlier this year that would prohibit insurance companies from using credit scores to set drivers’ insurance premiums.
If Senator Collins’s bill is enacted, insurance companies would no longer be allowed to charge a driver with a DUI conviction less than it charges a perfect driver based on their credit scores. Good drivers across the state would see relief from an insurance system that currently places more emphasis on your financial records than your driving records.
If you think that your auto insurance premium is high because of your credit score, contact your insurance company and find out if they use credit scores when pricing your policy (they probably do!), and let Woodstock Institute know what you find out. Drivers can also submit complaints or stories about their experience with insurers’ use of credit scores and other financial products and practices at www.consumerfinance.org/complaints.