It's not just creditworthiness and level of education that's being used to set your insurance premiums. Now some insurers are using your zip code!

A new metric that insurers use against you

A new study from the Consumer Federation of America (CFA) finds many auto insurers are setting rates not based on driving record, but on your street address and neighborhood you live in. To see the full study done by the CFA, click here. (note: this file is a pdf.)

This is really just a continuation of a long-standing practice. For years, some auto insurers have been giving level of education and occupation greater weight in setting insurance premiums. They believe they can accurately predict, for example, that a person with a master's degree who has had multiple claims will cost them less over time than somebody who never had an accident but only got a high school diploma.

And I've discussed several times over the years how many insurers love to obsess over your credit score. The September issue of Consumer Reports reports a real inequity in how a lot of insurers are pricing coverage. Many of them will charge a person with a DUI/DWI arrest a lower premium than a person with a perfect driving record who has a poor credit score.

Read more: What role does credit play in setting car insurance premiums?

 

 

The whole credit score thing in insurance drives me to distraction. Some insurers are convinced they can better set premiums based on your credit score than on your driving record. Using a credit score to set insurance rates is legal in 47 states, though it varies widely by insurer as to who is doing it and who isn't. But if you're paying more than you think you should be based on your driving record, this could be the reason why.

But it's not a monolith; not all insurers are doing this classification and even those who do have big differences in how they factor info about education and occupation into a final premium quote. So shopping your coverage at renewal time becomes key.

I think insurance should be a merit system. Sure, it's reasonable for age to be factored in -- think about the dangers of young drivers (and very old ones) behind the wheel. But over time, whether or not you have claims should determine what you pay. These other things like education and occupation are ridiculous criteria.

Have you considered these two insurers?

If you're with a poorly ranked insurer, there's no question: Shop the market to find a lower price and fire them! That's a win-win. You can get higher quality at a lower price.

On the other hand, if you're with the two elites of the insurance industry -- Amica and USAA -- I say you should stay even if it's more costly. However, here's the great news: Consumer Reports recently took a look at the insurance industry and determined these two top-ranked companies are cheaper than the competition!

In a 23-state survey, Consumer Reports found USAA was the lowest-cost insurer for the average person. However, USAA is only available to those in the military or affiliated with the military through direct family ties. For everyone else, there's Amica Mutual. Surveyed in 10 states, Amica Mutual was the second-lowest cost insurer.

The other insurers -- the ones you hear advertising all over the place -- range to as much as nearly double in premium vs. USAA to 50% more than what average person pays with Amica Mutual.

If you do shop Amica Mutual, I should note that the first year is expensive. Because it is a mutual, that means there are no shareholders and you must buy in to this company. But most customers typically get an annual rebate from the company of 20% of what they paid in premiums -- when they have a year with no claims.

So know that quality and low prices can both happen at the same time!

Read more: Best and worst home insurers

 

Image of Clark Howard About the author: Clark Howard

Clark Howard is a consumer expert whose goal is to help you keep more of the money you make. His national radio show and website show you ways to put more money in your pocket, with advice you can trust. View More Articles

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