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Is your less-than-perfect credit score costing you a bundle on auto insurance? A new study suggests this hidden fee might be costing drivers hundreds of dollars each year.

Most consumers know that low credit scores can cause all sorts of collateral damage, such as higher interest rates. However, in most states, it can also lead to higher auto insurance rates. Exactly how much damage remains a mystery, however, because insurance companies and other firms do not have to reveal how much the “low credit score” penalty fee is, thanks to a Supreme Court ruling back in 2007.

A new study by Consumer Reports claims the penalty could be costlier than you think. In fact, the study claims, having a low score can raise your rates even more than having a conviction for driving under the influence on your record. And even drivers with merely “good” credit instead of excellent credit pay a penalty, Consumer Reports found.

By pricing eight hypothetical single drivers of varying ages, the organization found that drivers who had merely “good” scores paid $68 to $526 more than similar drivers with the best credit scores, depending on their home state.

“In one example, Consumer Reports found that its single drivers in New York with a good credit score and clean driving record would pay an average of $255 more in annual premiums than if they had an excellent credit score. In another example, in Florida, CR’s group of adult single drivers with a clean driving record and poor credit paid $1,552 more on average than if the exact same drivers had excellent credit and a drunk driving conviction,” the organization said in a press release announcing that the issue was the subject of its upcoming August issue. It is also launching an advocacy site called Fix Car Insurance.

“Consumers have a right to expect that their car insurance premiums are based on meaningful behavior such as their driving record, and not on such factors as how they shop, pay their bills or how likely they are to tolerate that their rates have been hiked up,” said Consumer Reports Editor in Chief Diane Salvatore.

This is the second study by a consumer organization in recent days to criticize the complex way that auto insurers calculate premiums. The Consumer Federation of America released a study this week claiming that some insurance firms charge widows more than married women – roughly 14% more.

“The ‘widow penalty’ and other pricing related to marital status provides still another reason for state insurance departments to examine insurer pricing more carefully,” said J. Robert Hunter, CFA’s Director of Insurance and former Texas Insurance Commissioner. “Auto insurers are increasingly using non-driving factors in this pricing, and it appears that much of this pricing is unrelated to insurer risk.”

“It is not enough to base insurance rates on a driver’s record alone because the records are often incomplete, inaccurate or out of date…. A key thing to know is that this issue and discussion on the use of credit scores for insurance has been going on for decades. It’s not new, and it’s not secret,” said Loretta Worters, vice president of communications for the Insurance Information Institute. “Actuarial studies have repeatedly shown that how a person manages his or her financial affairs is a good predictor of insurance claims.”

Auto insurance rates can be the product of dozens, if not hundreds, of variables that look far beyond simple age and driving record. Innovations — like Progressive’s “Snapshot” tool, for example — even examine highly specific data such as frequent “hard braking.”

The exact formulas are a mystery to drivers, which makes it harder for them to shop around and compare providers, critics say. The formulas are shared with state insurance regulators; Consumer Reports says it used those formulas to compare pricing for its test-case drivers.

Those formulas include credit scores, but not necessarily the traditional FICO score that consumers can purchase. Most firms calculate their own credit scores using proprietary formulas, which are then weighted into rate calculations.

“Credit score is a really, really good predictor – better than a driving record,” Worters said.

In California, Hawaii and Massachusetts, state law prohibits use of credit scores in setting auto insurance rates, but elsewhere the practice is common.

“Consumer Reports found that most car insurance companies cherry-pick090 about 30 of the almost 130 elements in a credit report to create their own score for each policyholder that’s very different than a FICO score—and secret. If a car insurance company calculates that a consumer’s credit score isn’t up to its highest standard, it often charges a higher premium—even if the customer had never had an accident,” the organization said.

When credit scores are used to deny a consumer credit, lenders must inform applicants by sending what’s called a “Notice of Adverse Action.” (You can read more about what to do when you’re rejected for credit here.) But firms that use credit scores for other purposes, such as setting auto insurance rates, don’t have the same obligations. About 10 years ago, Geico and Safeco were sued over this practice, and lower courts ruled that insurers should have to tell consumers when they face a credit score premium penalty. But in 2007, the U.S. Supreme Court overturned a lower court ruling, partly because it feared a new flood of adverse action notices would be ignored by consumers.

The Consumer Reports study also claims that discounts, which are the heavy focus of insurance advertising, are often trivial.

“Bundling home and car insurance would save a typical policyholder just $97 a year; adding anti-theft equipment would save just $2 annually, when looking at national averages,” it said.

Given the complex way that auto insurance rates are set, there’s only one way consumers can make sure they aren’t being overcharged: by shopping around. It’s vital that consumers get rate quotes from numerous firms at least once every other year, and more frequently when there are significant life changes, such as a move or a change in marital status. It’s also important for consumers to know where they stand, credit-wise. They can do that by checking their credit reports and credit scores regularly. Consumers can get their free annual credit reports on AnnualCreditReport.com, and there are many ways to get free credit scores, including through Credit.com.

More on Credit Reports & Credit Scores:

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  • Olaf Johnson

    How is this legal!? Credit Scores has not a [redacted] thing to do with your ability to safely drive a car.

    My Grandma has a 850 credit score but can’t drive for [redacted]!

    People with bad credit usually don’t have a lot of money already to pay higher premiums so the car insurance industry is creating an unsafe environment of more reckless drivers out there and as a result more hit and runs since “poor” and “low tier credit” people would just not get insurance or stop paying after the first month. Then those poor idiots will hit your car or run over someone’s kid crossing the street and just drive right off!

    A few years when we switched our insurance Progressive/Gieco/State Farm/AllState all wanted our social security numbers (They wanted this information BEFORE our licence ID card numbers – hence driving record) to get a rate generated.

    I told my wife I don’t ever remember having to give my social security number for car insurance before. So I guess this credit score thing is a new thing they have come up with to charge more for insurance EVEN IF YOU ARE A GOOD DRIVER ALREADY! ….and they already penalize you if you don’t have a college degree. It is all about MONEY and GREED for this industry! Same with Health Insurance!

    America is a sad place sometimes!

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