Auto insurance companies’ use of credit information to determine rates poses a disproportionate financial burden on Black and low-income communities, but financial experts say there are ways to protect yourself.

A recent report from Consumer Federation of America found that Americans with fair or poor credit — regardless of their driving records — pay, on average, higher annual auto insurance premiums than people with excellent credit at 49% and 115%, respectively. When it comes to race, residents of mostly Black and Hispanic ZIP codes often pay far higher premiums for auto insurance than residents of mostly white ZIP codes because they tend to have lower credit scores or no credit score as a result of discriminatory laws, practices, and lack of access to financial services. In the report, researchers call on lawmakers to put an end to the practice.

Annette Harris, accredited financial counselor and owner of Harris Financial Coaching, said the high payments impose additional monthly expenses for drivers and negatively affect their financial and mental well-being. Because of high insurance costs, some people abandoned their cars or found other travel options. And in some regions, such as rural areas, vehicles are a necessity, as many residents may lack access to public transportation. For others, walkability remains a problem.

“In turn, it affects how they live day to day. It affects how they get to work — if they're on time for work or if they’re late for work. It’s caused a couple of my clients to lose their jobs,” Harris told Worldacad. “That affects their earning potential and how they can provide for their families or their children. Now they’re worrying, ‘Where’s my next paycheck gonna come from?’”

Worldacad spoke to Harris and Rahkim Sabree, a certified financial education instructor and consultant who focuses on financial trauma, about resources Black people can use to improve their credit score or attempt to reduce insurance rates.

What this looks like nationwide

In New Jersey, majority Black ZIP codes with poor credit paid an average rate of $3,038; majority Latino ZIP codes paid $3,047, whereas majority white ZIP codes paid $1,988, according to research by the Consumer Federation of America.

Having unfavorable credit creates shame or guilt, which is why it is important to start from a place of empathy instead of the information on a credit report, Sabree said.

“Your credit score is not your identity, as much as policies try to make it so, and whether it was due to negligence, ignorance, circumstance, or decisions that you’ve made in the past that ultimately have landed you where you are from a credit perspective … it doesn’t make you a bad person,” Sabree said. “So much of our lives are tied into what our credit history looks like. … It can be very demoralizing.”

Auto insurers’ use of non-driving-related factors such as credit scores, ZIP codes, education level, occupation, homeownership rates, and marital status can perpetuate racial discrimination. For example, in Washington state, the attorney general’s office launched an investigation into two insurance companies — PEMCO Mutual Insurance Co. and Progressive — and found they used consumer credit histories to decide whether to sell, and at what price to sell, their auto insurance products, which disproportionately harmed people of color. The companies tried to stop the investigation, but in November, a state superior court judge rejected their attempt.

“Publicly available information indicates PEMCO charges people with low credit scores as much as triple those with high credit scores; Progressive likewise significantly increases premiums for individuals with negative credit histories,” a news release said.

Organizations such as the Consumer Federation of America have advocated for lawmakers to step in. However, only three states — California, Hawaii and Massachusetts — ban auto insurers from using credit information to determine auto insurance rates. Last year, Washington state’s insurance commission temporarily instituted a three-year ban that prohibited credit scoring for auto, homeowner, and renter insurance rates, according to the National Conference of State Legislatures. But, state officials were immediately met with lawsuits from insurer groups, alleging that the rule “robs consumers of the benefits of a highly competitive private market.”

Ways to protect yourself

Harris and Sabree offer the following tips for consumers:

  • Request your free credit report on AnnualCreditReport.com and ensure the information is accurate. “Most importantly, [make sure] the accounts that are listed under your name are accurate, because Black people, in particular, have instances where a parent puts the cable bill or the phone bill in their child’s name. The child never knows about it. They grow up to establish their own personal finances, their own credit, and realize the delinquent bill is in their name, and now it is impacting them from moving forward. Make sure that things are accurate.” — Sabree
  • Don’t max out your credit card. “When you receive a credit card and may have, like, a $5,000 credit limit, if you max that out and use all $5,000, the insurance company will say, ‘OK, this person is overextending themselves.’ It will decrease your credit score, and it’ll increase what the insurance company is asking you to pay. Keep your utilization below 30%.” — Harris
  • Call the debtor or credit card company to negotiate. “Sometimes it’s as simple as calling up the credit company, or rather the debtor who was extending your credit, and asking them for a decrease in interest rates or asking them to waive the late fee — something that would ultimately negatively impact your credit building experience.” – Sabree
  • Ask the insurance companies about discounts. “There’s discounts for driving records, different safety features on your car, or if you’ve been a good student. There’s one that you put an app on your phone, they track your speed — whether or not you’re using your cellphone or you’re braking too hard in your car — and allowing them to track your driving history. It could save them up to $100 a month or more, depending on … what their driving looks like.” — Harris

Aallyah Wright is Worldacad's rural issues reporter. Twitter @aallyahpatrice