The High Cost of Bad Credit - Drivers with Bad Credit Pay More for Car Insurance

Most people think that the costs associated with having bad credit are "optional". For example, people with bad credit pay higher interest rates, but they always have the option of paying in cash. People with bad credit pay higher mortgage rates, but they always have the option of renting. They may even pay more for a cell phone plan, but they always have the option of keeping their land line. In these ways, the financial cost of bad credit can be avoided, with the only real cost being inconvenience. But when it comes to car insurance, all of the "options" run out.

How Are Car Insurance Rates Determined?

Car insurance rates are determined by a variety of factors. First and foremost among them are your driving record and the type of car that you drive. Secondarily, there are many factors: Your age, your gender, your marital status, and increasingly, your credit. Insurance actuaries have been able to show that people with bad credit get in more accidents and file more insurance claims, and therefore, they have been able to justify charging them higher rates. The problem is that car insurance is mandatory in almost every state, so while you can choose to pay in cash, to rent, and to use a land line instead of a cell phone, you cannot choose to go without car insurance - if you drive without it, you're breaking the law!

How Much Can My Bad Credit Cost Me?

A study by Consumers Reports found that people with bad credit can be charged as much as 47% more for their car insurance than people with average credit. This means that if someone with good credit were charged $2,000 a year for car insurance, a driver with bad credit would pay as much as $2,940, all other things being equal. That's over $78 per month!

The good news is that regulators in many states are looking at banning the practice of using credit to determine insurance rates - or should I say, that's good news for people with bad credit. People with good credit stand to lose when laws forbidding the practice are passed, which is why a ballot initiative in Oregon to forbid insurers from using credit to determine rates was defeated.

What To Do if Bad Credit is Affecting Your Rates

If you are paying too much for car insurance because of your bad credit, there are two solutions:

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