How Credit Scores Affect Auto Insurance Premiums

When selecting an auto insurance company in Texas, you know that several factors will affect the cost of your premium. Living in the hustle and bustle of Houston or Dallas, for example, you expect you will be paying more for auto insurance than someone living in the Brazos Valley. But did you know that auto insurance companies use your credit history as a major factor in determining the cost of your premium?

According to a report by the National Association of Insurance Commissioners, all fifteen of the United States’ largest auto insurance companies utilize credit scores in determining premium costs in states where this is allowed. In a small number of states, the practice is against the law, but in Texas, as ruled by the Texas Supreme Court in the 2011 case, Ojo v. Farmers Group, et al, insurance companies are permitted to use credit scores as a factor in determining premium costs. Take a look at https://www.texasquotes.com for more information on auto insurance in Texas.

In this court case, plaintiff Patrick Ojo filed a lawsuit against Farmers Group Insurance, charging that the insurance company’s use of credit scores was an act of discrimination. Ojo and his lawyers contended that the practice unfairly targets policyholders of certain minority races. After ruling in favor of Farmers Group, the Texas Supreme Court issued the following statement: “Texas law prohibits the use of race-based credit scoring, but permits race-neutral credit scoring even if it has a racially disparate impact.” Thus, in the state of Texas, auto insurance companies are free to factor in consumers’ credit history when determining premium costs.

You may be wondering why an auto insurance company would base premium costs on your credit score. One might guess that auto insurance providers are afraid someone with a low credit score would have trouble paying their premiums on time. However, this is not the reason auto insurance companies utilize these scores. The actual reason they look at credit history is to predict the insurance risk posed by a consumer.

The use of credit scores by auto insurance companies is highly controversial, though, and critics contend that a consumer’s credit history has nothing to do with the insurance risk they pose. However, a 2003 study from McCombs School of Business at the University of Texas shows that the auto insurance companies may be on to something here. According to the study, consumers with lower credit scores were more likely to file insurance claims than consumers with higher credit scores.

The findings of this study stirred up some controversy, with critics questioning the impartiality of the research. Because of this, in 2004, the Texas legislature ordered a study of its own from the Texas Department of Insurance. This study looked at six major auto insurance companies in Texas, and to the surprise of critics, its findings coincided with those of the University of Texas. According to the Texas Department of Insurance, auto insurance companies paid out less money in claims on policies held by consumers with high credit scores, as compared to those with lower credit scores. Although both studies show a definite correlation between low credit scores and high insurance risk, no reason for this correlation has been determined.

As a current or potential auto insurance policyholder in Texas, what can you do to make sure your credit score does not negatively affect the price of your premium? First, you need to know your credit score. The Fair and Accurate Credit Transaction Act of 2003 permits consumers to obtain a free credit report once every 12 months. There are three major credit bureaus that can provide you with this free report: Equifax, Experian and TransUnion. Make sure you check your credit report every year and scrutinize it to make sure there are no errors negatively affecting your score.

If you discover your credit score is low, you should take steps toward improving it. Make sure to pay bills on time, and if you have any outstanding balances, pay them off if you are able. Also, do your best to keep credit card balances low. The general rule is to use less than 30% of your credit limit, but if you use even less, your credit score can climb higher.

As a consumer, it is important to know exactly what you can do to keep your auto insurance premiums down to a manageable cost. Some factors are obvious– where you live, where you work, how many miles you drive every day– but it is surprising to many the role credit history plays in the cost of your auto insurance. As Texas is one of many states to permit the utilization of credit scores as a factor in determining auto insurance costs, make sure you are on top of your game and you don’t let a low credit score bump up your premium.