Things like credit score & marital status affect car insurance rates — should that change?

Car insurance companies have been criticized for using ‘non-driving factors’ for setting insurance premiums. Why do they do it?

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a certified personal finance counselor and former senior reporter at Policygenius, where he covered insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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Car insurance rates are increasing, and it might make you wonder: How do companies decide how much to charge? Aside from your driving history, car insurance companies also consider risk factors like your location, your age, and even your education level. But many people don’t like that insurance companies take “non-driving” factors into account when determining insurance premiums, arguing that it unfairly penalizes certain groups with higher rates. Some states have taken action to even the playing field. California, Hawaii, Massachusetts, and Michigan have banned car insurance companies from considering credit scores.

A new bill in New Jersey would go even further, prohibiting auto insurance companies from using education, occupation, homeownership status, or marital status to set rates, in addition to credit score. Assemblywoman Annette Quijano, a sponsor of the bill, says basing premiums on these factors “create(s) a two-tiered system that punishes poor and working-class New Jerseyans.” Consumer advocates say using these factors disproportionately affect people with lower incomes and people of color.

So why do auto insurance companies use data that seemingly has nothing to do with driving to determine how much to charge for car insurance?

How much do non-driving factors affect your car insurance?

The data helps predict accidents

You buy auto insurance to reduce the financial impact of a car accident, and auto insurance companies set your rates, or premiums, based on how likely they think it is that you’ll get into a car accident. People pay different prices based on their different risks of getting into an accident.

Auto insurance companies have found that all kinds of data, including the data that states like New Jersey are looking to ban them from using, can help predict how likely someone is to file a claim, says David Marlett, a professor at Appalachian State University and director of the Brantley Risk & Insurance Center.

“You have tons of historical data points for decades that show things like age, or experience, or gender, or type of car, or moving violations, or where you live, or credit score, are all very good predictors of whether drivers are going to have an accident or not,” he says.

Auto insurance companies have few ways to set themselves apart from one other. The product is “pretty much the same” from company to company, Marlett says. Aside from funny commercials, individual insurance companies try to gain advantages by creating more accurate formulas for predicting losses and setting prices. Companies create these formulas by gathering various data points about their customers and use them to calculate how likely you are to file a claim. 

How insurance companies respond to laws banning ‘non-driving factors’

If car insurance companies can’t use certain factors to determine premiums, they’ll have to weigh other factors, like your location and driving history, more heavily. They’ll still charge different customers different prices based on their perceived risk. Some drivers will pay less, and some drivers will pay more — it’s safe to say the insurance companies will keep charging enough to stay in business, Marlett says.

It’s not clear how laws banning the use of “non-driving” factors, like those in California, Hawaii, and Massachusetts, affect prices. Car insurance prices are on the rise in general because of inflation, supply chain disruptions, and the increased value of used cars, and Marlett says he hasn’t seen any studies isolating the impact of car insurance legislation. 

What to do if you’re paying too much for car insurance

If you think your educational level or marital status are affecting how much you pay for car insurance, it’s probably not going to be possible to change those factors to get a better deal. But because different insurance companies weigh these factors differently, you may get a better price if you compare rates and switch.

“The best thing you can do as a consumer is shop around,” Marlett says.

You can also lower your auto insurance premiums by raising your deductible, though you’ll pay more out of pocket in the event of an accident. You can also complete a defensive driving course or add a safety device to your vehicle. Many insurance companies have introduced usage-based insurance programs, which base premiums on your driving behavior — usually by tracking you through your phone. This can mean serious savings for safe drivers, based solely on how you drive — not whether you’re married.

Image: Thomas Barwick / Getty