Crumple zone: Bad credit and auto insurance costs

A bad credit rating can affect you in unexpected ways. A new study by InsuranceQuotes.com found that car owners with bad credit but perfect driving records can pay two to three times more in auto insurance premiums than those with excellent credit.

The study found that, on average, car owners with fair credit paid 28 percent more than a driver with excellent credit. And with poor credit, that jumps to 104 percent greater premiums -- more than double the rate for owners with excellent credit.

That difference can lead a tripling of insurance premiums in some places. Arizona, New Jersey, Nevada, Nebraska and Oklahoma shows more than 200 percent premium hikes for poor credit drivers versus those with excellent credit.

If you live in California, Hawaii or Massachusetts, your credit rating doesn’t affect your auto insurance costs because those states have forbidden the practice. But in all other states, your credit rating definitely figures in.

“What’s really concerning is that 42 percent of Americans aren’t aware that there’s a relationship between credit and insurance rates,” said Laura Adams, senior insurance analyst at insuranceQuotes.

Furthermore, the credit rating that insurance companies use isn’t the familiar FICO score mortgage lenders and credit card companies use. Instead, insurers get a credit-based insurance score, or CBIS. Although this metric uses many of the same factors -- such as any late payments and size of credit card balances -- the CBIS is aimed at determining how likely a policyholder is to file a claim.

Insurers say car owners with high CBIS ratings are less likely to file claims, though they aren’t sure why this is so. One possibility is that people with high-rated finances may pay out of pocket for minor fender-bender repairs rather than filing a claim.

Critics say it’s unfair to use credit scoring to set premiums. Insurance expert Doug Heller with the Consumer Federation of America told InsuranceQuotes that premiums should be related to “factors that have a meaningful relation to risk,” such as how much and how far you drive each year, whether you’ve recently had an accident or DUI conviction, or the length of time you’ve been driving. If someone has financial troubles, it doesn’t mean he or she is an unsafe driver, Heller added.

If you have less-than-excellent credit, you have lots of reasons to try improving it, but lower auto insurance rates add motivation. Financial counselors advise taking these steps:

• Be careful to pay all bills on time. Late payments are a major negative to rating agencies.
  
• Don’t open new credit accounts. That’s another ratings minus.
  
• Keep credit card balances as small as you can and even pay them off if you can.
  

If you do succeed in boosting your overall credit rating, ask your insurer to run your score again. If it finds that your CBIS has also improved, you could get a lower premium.