Andrea Coombes

Got bad credit? You could be paying twice as much for car insurance than if you had top-notch credit—even if your driving record is stellar. And it’s not just a problem for people with bad credit: The outright lack of a credit file also can push you into higher premiums.

Just ask Donald Tonack. Despite a pristine driving record—he and his wife have never had an accident—and years of timely bill payments with zero claims, his insurer raised his premium by 11% a few years ago because, the company told him, he had no credit history.

Mr. Tonack and his wife, residents of Lebanon, Ore., say they’ve always paid for just about everything in cash. “I’ve never made a late payment in my life,” says Mr. Tonack, a 76-year-old retiree and pastor—and a former insurance underwriter. “We were probably the best risk they had on the books.”

A recent study of five large car insurers by found wide variations in rates quoted online for two hypothetical people, identical except that one had excellent credit and the other had no credit.

Model Drivers

In the study’s scenario—two 36-year-old, unemployed men, each driving a 2008 Honda Accord—the man with no credit faced premiums 65% higher on average nationwide than the man with good credit.

That differential was highest in Washington, D.C. (126%) and lowest (18%) in Vermont. (The study assumes the men live in a ZIP Code with each state’s median income.) California, Massachusetts and Hawaii showed no differential; they prohibit the use of consumer credit histories in setting car-insurance rates.

But the research is clear: Consumer credit histories play a key role in car-insurance rates. A December 2013 study by the Consumer Federation of America, a nonprofit advocacy group, found that a single, 30-year-old woman paid 39% to 127% more for auto insurance, depending on the carrier, if she had poor credit rather than excellent credit.

Even average credit can cost you more: Drivers with median credit paid 24% more for insurance than those with great credit, according to a study in October by, a Bankrate company. While insurers use proprietary scoring models, in the world of consumer credit a FICO score of 760 and up is generally considered great credit and below 620 poor.

It’s not only car insurance. People with poor credit paid as much as 91% more for homeowners insurance than those with excellent credit. Those with fair or median credit paid 29% more, according to (California, Massachusetts and Maryland prohibit the use of credit histories in setting home-insurance rates.)

That’s bad news for the estimated 77 million people—a third of U.S. adults with a credit file—who had a debt in collections (more than 180 days past due) in 2013, according to the Urban Institute, a research think tank.

For insurers, it comes down to a correlation between low credit scores and a higher number of insurance claims. Credit history “has been determined to be highly predictive of loss in the auto-insurance line,” says Robert Hartwig , an economist and president of the Insurance Information Institute, a trade group. While some drivers with poor credit will buck that correlation, Mr. Hartwig says the situation is similar to charging higher rates to teenage male drivers. They are likelier to be in an accident, even though “I can find teenage males who’ve never been in an accident,” he says.

Some consumer advocates say that’s not enough. “The actuarial standards of practice say it doesn’t have to be direct causation, but [the correlation] has to have a logical basis,” says J. Robert Hunter, an actuary and director of insurance at the Consumer Federation of America. “Where is the logical relation to risk? Why would someone who has a worse credit score have a worse driving record?”

While a negative credit history suggests a person can’t or won’t pay his bills, that poses little risk for auto insurers, he says. “If you don’t pay your premium, you don’t keep your policy,” Mr. Hunter says. “We don’t see that as a risk they need to put a price on.” He cites California’s highly competitive insurance market as proof that credit history can be ignored.

Check It Out

For consumers, the message is: Check your credit. Even if you pay your bills on time and never had a financial setback, an error on your credit report could hit your insurance rates.

“You get a quote, you think, ‘That must be what I deserve,'” says Odysseas Papadimitriou, WalletHub’s founder and chief executive. “Meanwhile, your credit report has some bad information so the quote is completely wrong and you have no clue. And you pay potentially hundreds of dollars.”

Visit to request a free copy of your report every year from each of the three big credit-reporting companies. If your credit has improved recently, shop around for insurance.

Or ask your current carrier to re-rate you—if you’re sure your credit has improved. You risk triggering higher premiums if your credit has worsened, says Laura Adams, a Burlingame, Calif.,-based senior insurance analyst with (Generally insurers don’t check your credit every time they renew your policy. Mr. Tonack’s carrier likely was instituting a new credit-based pricing policy.)

For his part, Mr. Tonack, the Oregon man with no credit history, decided to build one by using a credit card to buy groceries and other items. Soon enough, his credit score “went to the top.” He called his homeowners insurance company. They slashed his premium by 30%.

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