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Some state legislatures want to ban practices among insurance companies that could drive up costs for consumers.
Bills are pending in several state legislatures, including Iowa, New York, Oklahoma and Pennsylvania, that would essentially prohibit insurance companies from using consumers’ credit histories to set homeowners and/or auto insurance premiums.
So-called credit-based insurance scores used by insurance companies measure whether someone is likely to make a claim. The lower the score, the more likely it is. And, as a result, the premiums charged may be higher.
“This is true even if you have a perfect driving record or are a relatively low risk,” said Michael DeLong, a research and advocacy associate at the Consumer Federation of America, a nonprofit that advocates for consumer rights and supports legislative efforts to change practices.
DeLong said credit-based insurance scores are “grossly unfair.” “As a result, people end up paying much higher premiums, making insurance expensive or unaffordable for many people.”
Only a few states prohibit insurance companies from using your credit history
Other state legislatures have considered similar proposals in the past few years, but efforts by advocates to stop the practice have had little success. Currently, only a few states prohibit the use of credit history in determining certain coverages, with California, Hawaii, and Massachusetts prohibiting the use of credit history in auto insurance. California, Massachusetts, and Maryland prohibit its use for homeowners insurance.
However, there are limitations elsewhere. According to the National Association of Insurance Commissioners, a group of state insurance regulators, most states prohibit insurers from using credit-based insurance scores as the sole reason for raising rates or denying, canceling or refusing to renew a policy. Additionally, many states require insurance companies to notify consumers if their credit information is used to make an adverse decision.
Insurers’ use of credit-based insurance scores is one of the tools they use to “fairly and accurately assess a person’s risk and keep premiums low,” said Bob Passmore, vice president of personal affairs at the Property Casualty Insurance Association of America, which represents home, auto and commercial insurers.
“Eliminating the use of credit-based insurance scores would eliminate savings for many consumers and result in insurance rates that are less fair and accurate for everyone,” Passmore said.
A 2007 study by the Federal Trade Commission found that when credit-based insurance scores were applied to a database created by the agency using insurance policy and claims information, 59 percent of consumers in the database predicted their premiums would decrease, and 41 percent predicted their premiums would increase.
The difference in insurance premiums can be significant.
According to NerdWallet, each insurance company determines a “good” credit-based insurance score, but you can often tell how good your insurance score is from your regular credit score. According to Experian, a standard credit score of 300 to 579 is generally considered bad credit, and 580 to 669 is considered good credit. Good credit includes a score between 670 and 739. Credit score is very high, 740-799. 800-850 is an exceptional credit score.
According to various studies, a low credit-based insurance score can lead to significantly higher insurance premiums. For example, a recent study from the National Bureau of Economic Research found that homeowners with low scores pay 24% more than homeowners with high scores for the same coverage.
According to a March report from NerdWallet, drivers with bad credit pay, on average, 69% more than those with good credit. In some cases, studies have shown that a bad credit score can result in higher insurance premiums than a recent DUI.
“You can have a bad credit score for a variety of reasons,” DeLong says. “Sometimes you’re irresponsible and don’t pay your bills on time, or your credit goes down because you lost your job in a mass layoff that wasn’t your fault… or you went through a divorce or financial hardship. It’s not fair to punish people.”
