Is Bad Credit Affecting Your Car Insurance Rates?

heading divider

No one wants to pay thousands of dollars per year in car insurance. But could your bad credit be affecting your car insurance rates? More importantly, should auto insurance companies be allowed to consider your financial history in determining your risk of being in an accident?

In Michigan, no-fault auto insurance is mandatory. Every person who owns a vehicle has to pay for insurance or put themselves at risk for criminal charges and thousands of dollars of medical expenses if they get into a car crash while uninsured.

For low-income drivers, particularly in urban areas like Detroit, the cost of car insurance can be daunting. Bills pile up, and maybe these drivers make bad decisions with their credit. Little do they know, those decisions could actually cost them far more by doubling their car insurance rates.

A comparative insurance website called The Zebra recently paired up with Credit Sesame and Quadrant Information Services to get to the bottom of high insurance rates. They examined credit and insurance data for million Americans. They found that most people don’t understand their credit scores, and it is hurting their auto insurance rates.

Americans Don’t Understand Their Credit Scores

Even though nearly half of Americans have Poor credit (42%), only 11% of Americans believe they fall in that category. Instead, a full 73% think they have Good credit. Only 17% qualify for Excellent credit.

Bad Credit Doubles Auto Insurance Rates

The Zebra study surveyed national auto insurance premiums and how they changed based on credit scores. For Michigan they found residents with:

  • Excellent Credit Paid $1,844 Per Year.
  • Good Credit Paid $2,864 Per Year.
  • Poor Credit Paid $5,109 Per Year.

That means, in Michigan, bad credit will hike your auto insurance rates more 2.5 times as much as your neighbor with excellent credit.

What Does Credit Have to Do With Insurance?

Insurance companies like Esurance by Allstate admit that they use credit scores to set rates. They claim a Poor credit rating correlates with a higher risk of a crash. Other factors more directly relate to the risk of accidents, like your driving record. But not even the insurance companies can explain how making bad credit decisions increases the risk of a crash.

It may be that credit scores are a smoke screen for discriminatory red-lining practices. Minorities tend to be over-represented in Poor credit categories, so these higher insurance rates hurt African American and Latino families more than Caucasians.

Auto insurers shouldn’t be allowed to charge more for being poor. By doing so, they force minority and low income families to choose between following the law and paying their bills.

David Christensen is an auto accident attorney at Christensen Law in Southfield, Michigan. He fights back against auto insurance companies. If you have been in a car crash, contact Christensen Law today for a free consultation.