Pedro Montenegro was puzzled by the car insurance quote he received when he moved to Washington, D.C., from California.
The only ticket he ever got was for a broken taillight that he later fixed. But despite a near spotless driving record, Montenegro was facing a $300 monthly premium, much more than some of his friends who he believed drove more recklessly.
He eventually realized the high quote was likely due to his low credit score.
“It’s both silly and unfair,” says Montenegro, 29, whose credit score hovered in the low 500’s because of student loans and irresponsible spending when he was younger. “I definitely don’t think something like a credit score should factor in at all, or as much, as your driving record,” he says, adding, “the credit score only says a small part about you.”
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Bad credit is not like risky driving
A low credit score can increase what drivers pay for car insurance by hundreds of dollars, consumer advocates say. Yet 66% of Americans don’t know their credit history is a factor when most car insurers are deciding how much to charge them, according to a study by the insurance company Root.
“There are lots of reasons that people have bad credit that have nothing to do with their risk-taking behind the wheel, and yet it is one of the dominant features in pricing,” says Douglas Heller, insurance expert for the Consumer Federation of America. “Because laws in virtually every state require people to buy this product, there’s a special obligation to make sure the pricing is fair .’’
Premiums can take a toll financially with 35% of those surveyed saying they couldn’t pay for essentials because their payments were so high. And the pricing practice poses a particular hardship for African Americans, Latinos and Indigenous Americans who are more likely to have poor credit histories often due to systemic biases and challenges, consumer advocates say.
“We have an auto insurance market that is deeply discriminating in its outcomes,” says Heller. “Even if you have this perfect driving record, you’re going to be paying extremely higher rates and that tends to mean Black and Latino and Native Americans are paying more.”
A mandatory cost
Car insurance is required in every state except New Hampshire and Virginia And credit history is typically one of the factors car insurers look at to calculate how much a customer will pay.
Drivers with the lowest credit scores pay over $1,500 more a year on average than those who have the strongest credit histories, according to the insurance comparison site Zebra. Only California, Hawaii and Massachusetts currently bar the consideration of credit scores for auto policies.
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While Americans of all backgrounds can see their credit scores dip because of missed payments or delinquent loans, a credit-based criteria can disproportionately penalize people of color, even if that disparity is unintentional, some experts say.
Black and Latino Americans on average have lower credit scores than whites, according to the Federal Reserve, but those ratings are affected by circumstances that often reflect broader social inequities. For instance, Black and Latino Americans typically have higher unemployment rates than whites, and lost income can lead to unpaid bills.
“There’s a long history of unequal access to financial services that has hampered economic uplift of communities of color across this country for generations, and that plays out in myriad ways, one of which is scores based on credit history,” Heller says.
A decades-old practice
The auto insurance industry has used credit history as a metric to help determine a driver’s risk since the early 1990s.
“It’s really simply one tool among other tools used to predict the possibility of a future claim’’ along with the potential cost, says David Snyder, vice president of the American Property Casualty Insurance Association. Prior driving experience and age are among the other factors that are considered.
Insurers do not consider race when making their decisions, Snyder says. And 25 states have legislation, supported by the National Conference of Insurance Legislators, that enables a customer to have their credit-based score revised if they are dealing with a crisis like a serious illness, divorce, or being laid off during the COVID-19 pandemic.
Snyder says consumers should definitely ask questions when shopping for a policy.
“We do encourage people to know what factors are being used to predict their likelihood of future risk,’’ he says.
But Alex Timm, Root’s CEO and founder, says drivers rarely do.
“Most people have no idea why they’re paying what they’re paying,” he says, adding that credit histories have “nothing to do with your driving record … It’s an antiquated practice that’s stayed around for way too long and is unfair and is hurting communities.”
Heller of the Consumer Federation of America believes it’s also about dollars and cents. Drivers with higher credit scores tend to be more affluent, increasing the likelihood they’ll buy more products, such as home coverage, life insurance and policies for multiple cars.
“Insurance companies use credit scores to mark the customers they really want,” Heller says, and to “give them the best deal.”
Insurance or food?
Andrew Kolb says his credit score once sank as low as 412 because of “a series of bad decisions” he made when he began to get his first credit cards.
That credit history has haunted Kolb, 34, who drives for a private car service. It led a landlord to require Kolb and his wife to put down a double deposit on their home, and an insurance company told Kolb point-blank that his poor credit was the reason for his high car insurance premium.
“They say you can’t do this because your credit is terrible, you can’t do that,’’ says Kolb, who lives with his wife and three children in Evans, Colorado. “It has nothing to with who I am, or how I perform my work, or how I drive.’’
Kolb now pays a premium of roughly $100 a month, which his family is able to afford even though he hasn’t worked since March and his wife is supporting the family working two jobs. But in the past, when he paid at least twice that amount for previous policies, “I let the car insurance go several times,’’ he said. “Between paying for the house or …keeping the heat on, I’m going to pay that before I pay my insurance if the premium is super high.’’
Kolb says that getting older and having a family to take care of has made him more responsible, but he’s even worked with an agency to help improve his score. Still, once your credit “is destroyed,” he says, “it takes years to recover.”
New tools can create more equity
To set premiums, Root Insurance uses smartphone technology to monitor braking, how fast a driver makes a turn and other behavior to help determine who drives safely and who does not.
“You can measure how people drive through cell phones,” says Timm.
The company, which says it uses credit history to a very limited extent, plans to eliminate its use altogether by 2025.
“We looked at credit scores and the particular impact it has on people who need insurance the most and are least able to afford it,” Timm says, adding that the economic hardships that have arisen during the pandemic have “shown this is a very urgent matter.”
The economic toll extends beyond the individuals who are paying higher premiums every month, Heller says.
“When we throw up barriers to insurance based on … personal financial challenges that themselves are rooted in bigger social problems, we’re not just making life difficult for people with low credit scores,” Heller says. “When the pool is smaller … we (all) have to pick up the tab.”
Among those who responded to the Root survey, 82% believe driving history should be the primary factor used to determine premiums while only 6% think a credit score should be key.
Currently, Maryland, New Jersey, Oregon and Washington are considering legislation that would bar the consideration of credit histories when calculating insurance costs,
Heller says those bills may represent yet another shift spurred by the increased focus on social inequities in the wake of the killing of George Floyd and the massive protests that swept the country last year.
“Policymakers and regulators and even, to a degree, companies have tried to look at the practices in various parts of the economy to see where systemic bias was hiding,” he says. “Credit scoring is right up there,” he says, adding, “getting rid of it would be a huge improvement for consumers.”
Follow Charisse Jones on Twitter @charissejones