Home, car insurance rates based on credit history face state scrutiny

Some state lawmakers want to ban a common practice among insurance companies that can drive up costs for consumers.

Bills are pending in several state legislatures — including in Iowa , New York, Oklahoma and Pennsylvania — that would generally prohibit insurers from using consumers’ credit history to set their premiums for either homeowners or auto insurance policies, or both. 

The 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 likelihood. And, in turn, the higher the premiums they might be charged.

“This is the case even if you have a perfect driving record or your risk is relatively low,” said Michael DeLong, research and advocacy associate at 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 “extremely unfair,” DeLong said. “It results in people paying much higher premiums and makes insurance expensive or unaffordable for a lot of people.”

Other state legislatures have considered similar proposals in past years, but efforts by supporters to stop the practice have largely been unsuccessful. Currently, only a few states ban the use of credit history in certain coverage decisions: California, Hawaii and Massachusetts prohibit it for auto insurance. In California, Massachusetts and Maryland, the use of it for homeowners insurance is banned.

There are limits elsewhere, however. In most states, insurers are banned from using credit-based insurance scores as the only reason to increase rates or to deny, cancel or refuse to renew a policy, according to the National Association of Insurance Commissioners, a group comprised of state insurance regulators. Additionally, many states require insurers to notify a consumer when credit information was used in an adverse decision.

Insurers’ use of credit-based insurance scores is one tool to “fairly and accurately assess an individual’s risk to help keep premiums low,” said Bob Passmore, department vice president of personal lines for the American Property Casualty Insurance Association, which represents home, auto and business insurers.

“Eliminating the use of credit-based insurance scores [would] result in the loss of savings for many consumers and result in rates that are less fair and accurate for all,” Passmore said.

A 2007 study from the Federal Trade Commission found that when credit-based insurance scores were applied to a database the agency created using policy and claim information, 59% of consumers in its database would be predicted to see their premiums decrease, and 41% would see an increase. 

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. Generally, a standard credit score of 300 to 579 is considered poor credit and 580 to 669 is fair credit, according to Experian. Good credit involves a score of 670 to 739; very good credit, 740 to 799; and 800 to 850 is exceptional credit.

Various research shows that a low credit-based insurance score can result in much higher premiums. For example, homeowners with a low score pay 24% more than high-score homeowners for identical coverage, according to recent research from the National Bureau of Economic Research.

Rates for drivers with poor credit are 69% higher, on average, than for people with good credit, according to a NerdWallet report from March. In some cases, poor credit can result in a higher premium than a recent DUI would, the study shows.

“You can have poor credit for a variety of reasons,” DeLong said. “You can be irresponsible and not pay your bills on time, or you can have poor credit because, say, you lost your job through a big layoff, and that was not your fault … or maybe you went through a divorce or a financial hardship. It’s not fair to penalize people.”