Home, car insurance rates based on credit history face state scrutiny
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Some state lawmakers want to ban a common practice among insurance companies that could raise costs for consumers.
Bills are pending in many state legislatures Iowa , new York, Oklahoma And Pennsylvania -This would generally prohibit insurance companies from using consumers’ credit history to determine premiums for homeowners or auto insurance policies, or both.
So-called credit-based insurance scores used by insurers measure whether someone is likely to file a claim; the lower the score, the higher the probability. And in turn, the premiums they will be charged can be that much higher.
“This is the case even if you have an excellent driving history or your risk is relatively low,” said Michael DeLong, research and advocacy officer for the Consumer Federation of America, a nonprofit that advocates for consumer rights and supports legislative efforts to change the practice.
Credit-based insurance scores are “deeply unfair,” DeLong said. “This causes people to pay much higher premiums and makes insurance expensive or unaffordable for many people.”
Only a few states prohibit insurance companies from using credit history
Other state legislatures have considered similar proposals in past years, but efforts by supporters to stop the practice have largely failed. Only a few states currently prohibit the use of credit history in certain coverage decisions: California, Hawaii, and Massachusetts ban it for auto insurance. California, Massachusetts, and Maryland prohibit its use for homeowners insurance.
But there are limits elsewhere too. Insurers in most states are prohibited from using credit-based insurance scores as the sole reason to raise rates or deny, cancel or renew a policy, according to the National Association of Insurance Commissioners, a group of state insurance regulators. Additionally, many states require insurance companies to notify the consumer when credit information is used in an adverse decision.
Bob Passmore, division vice president of personal lines for the American Property Casualty Insurance Association, which represents home, auto and business insurers, said insurers’ use of credit-based insurance scores is a tool “to fairly and accurately assess an individual’s risk to help keep premiums low.”
“Eliminating the use of credit-based insurance points [would] “This results in lost savings for many consumers and less fair and accurate rates for everyone,” Passmore said.
A. 2007 study A study from the Federal Trade Commission found that when credit-based insurance scores were applied to a database the agency created using policy and claims information, 59% of consumers in the database were predicted to see a decrease in their premiums, while 41% were predicted to see an increase.
The difference in premiums can be huge
While each insurer decides what a “good” credit-based insurance score is, your regular credit score can often give you an idea of what your insurance score is, according to NerdWallet. According to Experian, in general, a standard credit score between 300 and 579 is considered poor credit, while a standard credit score between 580 and 669 is considered fair credit. Good credit includes a score between 670 and 739; very good credit, 740 to 799; and 800 to 850 is an outstanding credit.
Various studies show that a low credit-based insurance score can result in much higher premiums. For example, according to a recent study, homeowners with lower scores pay 24% more than homeowners with higher scores for the same insurance coverage. research From the National Bureau of Economic Research.
Rates for drivers with bad credit are on average 69% higher than those for people with good credit. a NerdWallet report Starting from March. The study shows that in some cases, poor credit can result in higher premiums than recent drunk driving.
“You may have poor credit for a variety of reasons,” DeLong said. “You might be irresponsible and not pay your bills on time, or you might have a bad credit score because you lost your job, say, due to a major layoff and it wasn’t your fault… or maybe you got divorced or had financial trouble. It’s not fair to punish people.”
