Car Insurance Credit Problems

The vast majority of car insurance underwriters consider your credit history when approving you for an insurance plan and your premium, according to GMAC Insurance. Car insurers believe that your credit score reflects how risky you are as a person. Some lobbyists, however, claim that using credit checks in the insurance industry is a form of discrimination.

Effects

Car insurance companies usually give more weight to your credit score than your driving history, because credit scores have a direct relationship to the chances of the consumer filing a claim, according to the Insure website. Alternatively, if you have no driving history, a insurance provider might use your credit history as a reason to give you coverage.

Effects

On average, people with poor credit pay 20 to 50 percent more for insurance than those with excellent credit, according to BankRate. This occurs because as credit scores drop, so does your insurance score. Like your credit report, credit rating agencies have a proprietary formula to calculate risk to insurers.

Criticism

Critics of credit checks in the insurance industry, such as Birny Birnbaum, executive director for the Center for Economic Justice, claim that Congress should outlaw this practice because credit scores assess financial risk, not driving risk. Also, because minorities are more likely to hurt from credit checks, it is a subtle form of racial bias. Insurance score formulas are secret, so nobody truly knows how much weight insurance companies give to a credit score.

Tip

Before shopping for insurance, check your own credit report -- you receive one free each year. As many as 80 percent of credit reports contain an error, so correcting this will raise your score immediately. If you find an error, you can request the credit agency notify all insurers that pulled your report in the past six months.