Is Your Bad Credit Inflating Your Nevada Auto Insurance Bill?

A new analysis of nearly 6,000 Nevada auto insurance quotes confirms something most insurance industry members already know but few Nevada consumers may be aware of: having deteriorating credit could significantly impact your access to cheap car insurance coverage.

Just over half of Americans know that their credit standing may influence how much they end up paying for auto insurance, according to a survey from the National Association of Insurance Commissioners, but credit-based insurance scoring is actually a very common practice. In our analysis, 19 out of 21 insurers raised rates when a policyholder's credit history worsened, and the same may be happening to you if you have deteriorating credit.

Our quote analysis looked at three driver profiles, comparing sample premiums for each when their credit-based insurance score was “best,” “average/neutral,” and “worst.” (See methodology note for full details)

The results of the analysis showed the following:

  • Dropping from a best possible score to average/neutral increased rates by an average of 35 percent.
  • Dropping from an average/neutral score to the worst possible increased rates by 69 percent on average.

If the drivers in our analysis went all the way from having the best possible score to having the worst possible score, their rates increased by an average of 129 percent.

The results showed a wide range of credit-based pricing practices among the companies represented in the data, which included big names like Allstate, GEICO, Progressive, and State Farm. Out of the 21 insurers included in the analysis, only two gave drivers the same rates regardless of the shape of their credit.

For the insurers that did incorporate credit into their pricing models, the effect that this variable had on prices ranged pretty widely. Check out the chart below to get an idea of the full range of increases:

Charts showing how big insurers' surcharges were when a policyholder had deteriorating credit

As you can see in the chart, when a driver’s credit-based insurance score drops from the best possible to neutral/average, none of the insurers raised rates by more than 100 percent. The most common increase in this category was between 25 percent and 50 percent, which could still be a pretty sizeable sum, depending on your existing premium. If you had a $1,000 annual premium and saw such an increase, you’d end up with a premium bill of between $1,250 and $1,500.

When a driver’s insurance score drops from neutral/average to the worst possible, however, the sizes of insurers’ increases are much more spread out. The most common increase in this category was between 50 percent and 75 percent, which would raise a $1,000 annual premium by an extra $500 to $700.

The data showed that the biggest increase for going from neutral/average to worst was 180 percent. Someone with a $1,000 annual premium who saw that maximum increase would end up having to pay $2,800 a year if they stayed with the same company.

What Is My Credit-Based Insurance Score?

Determining whether your credit-based insurance score is closest to being best, average/neutral, or worst can be difficult because your score doesn’t necessarily correlate with your Equifax, Experian, or TransUnion credit scores. In addition to that, there are many data sources insurers can use for credit information, and insurers don't always weigh the same factors evenly.

A 2011 report from the Nevada Division of Insurance (DOI) says most large insurers in the state use their own in-house scoring models, but others have contractual agreements with third-party vendors that calculate the scores independently.

According to the DOI, the following factors are commonly used for calculating the insurance score of a person applying for coverage:

  • Number of late payments on credit accounts
  • Number of adverse public records
  • Length of credit history
  • Number of credit inquiries
  • Number of accounts recently opened
  • Usage rate of credit accounts
  • Total credit balances
  • Mix of different types of credit
  • Number of credit accounts

The DOI says that drivers who have no credit history or haven’t yet established a significant history of credit are usually rated as having an average/neutral score.

Credit-based insurance scores only look at information pertaining to credit payments, so things like not being on time with your rent or utilities payments shouldn’t affect your insurance score. However, if you are delinquent to the point where your bills go to collections, that could affect your score.

Read our article on insurance scoring in Nevada for more specifics on how credit affects auto policies in that state, or read our FAQ on credit-based insurance scores in general.

Why Insurance Scores Are Used in Auto Insurance Pricing

When it comes to pricing insurance policies for an individual driver, insurers will take into account any conceivable variable that is legal to use and can help them predict both how often a person will file a claim and how big their claims are likely to be. As it turns out, insurers' claims data and numerous studies have shown that credit can be a good indicator of how much a driver will cost his or her insurer in claims payments.

The most extensive of those studies was conducted in 2007 by the Federal Trade Commission (FTC). For the study, the FTC looked at a large database including information about credit status and claims statistics and then examined the relationship between the two. The database the FTC examined contained about 1.4 million policies.

Specifically, they looked at how credit correlated with the size and frequency of claims filed under the four most common parts of an auto insurance policy: bodily injury liability, property damage liability, comprehensive, and collision coverage.

The chart on the right shows how much drivers in different credit tiers ended up costing their insurers per year, on average.

The FTC study showed that for property damage liability and collision coverage, drivers with the worst credit histories filed claims more than twice as often as drivers with the best credit histories.

For bodily injury liability and comprehensive coverage, drivers with the worst credit histories were about 70 percent more likely to file a claim in a given year when compared with drivers who had the best credit histories.

In the end, the FTC concluded that:

"Credit-based insurance scores are effective predictors of risk under automobile policies. They are predictive of the number of claims consumers file and the total cost of those claims. The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer. Thus, on average, higher-risk consumers will pay higher premiums and lower-risk consumers will pay lower premiums."

Why Credit Is a Reliable Indicator of Claims Activity

While plenty of claims data and independent reports have verified credit's relative reliability in predicting how much insuring a driver is likely going to cost an insurer, there's little consensus on why the relationship exists.

The authors of the FTC report didn't come to any definitive conclusions, but they did offer some possibilities for consideration:

  • Consumers who are prudent with financial matters may also be cautious with things like insurance. As a result, they may invest more time into the maintenance of their cars and exhibit more care while on the road.
  • Ongoing psychological research shows people who engage in risky behavior in one area of their lives (e.g.: credit) may be more likely to take risks in other areas (e.g.: driving).
  • Having financial problems may make a person more likely to need to rely on insurance. A person with good credit and ample savings may be more likely to simply pay for the repair of smaller damages out of pocket rather than file a claim and risk the possibility of having their rates increase as a result.

To see our infographic showing how deteriorating credit can affect your overall car costs, click here.

Note on methodology:(Return to top)
Quotes were taken from the Nevada Division of Insurance's 2012 Consumer's Guide to Auto Insurance Rates.
In addition to credit-based insurance score, the following three other variables were used for each driver profile: car type, coverage level, and location. The two car types used in the analysis were a 2011 Hyundai Sonata and a 2009 Toyota Tacoma. The two liability levels used in the analysis were 15/30/10 and 100/300/50. The nine different locations used were Carson City, Elko, Fallon, Henderson, Las Vegas, North Las Vegas, Pahrump, Reno, and Stateline. Quotes were given for each possible combination for all three profiles, and the final analysis is based on the average prices for all of those options.