States Are Banning the Use of Credit Scores to Set Car and Home Insurance Rates
Is it fair to charge higher auto insurance premiums and home insurance rates because a person has a low credit score?
A new rule in Washington state will prohibit the practice, joining a handful of other states that have similar bans. But the insurance industry is fighting back, arguing that the ban could actually result in many customers having to pay higher premiums.
Washington's new rule is aimed at preventing people with poor credit from facing higher rates for their homeowner, auto and renters insurance — especially during the pandemic, which has disrupted the finances of millions of Americans. The rule is slated to go into effect on March 4 and last until federal and state pandemic financial protections end or for three years, whichever is longer. The state's insurance commissioner has said he will work to make the ban permanent.
Washington is arguing that using credit scores to calculate insurance premiums is unfair. The state’s insurance commissioner has said that people who struggle financially (and wind up with low credit scores) are often victims of circumstances outside of their control, like unemployment, unexpected medical expenses and natural disasters.
A 2020 study by the Consumer Federation of America found that good drivers in Washington state with a poor credit rating (FICO considers a score lower than 580 to be poor) paid 79% more for their mandatory auto insurance than drivers with excellent credit. “I just don’t think it’s fair to good drivers to punish them if they’ve had some credit difficulty,” Washington Governor Jay Inslee said in remarks reported by the Associated Press.
A few other states have bans or restrictions similar to Washington’s new rule, including Hawaii, California, Michigan, Massachusetts and Maryland.
How are credit scores used?
Credit scores are used by lenders to assess the risk of lending you money. The higher your score, the more likely a lender is to consider you a good candidate for all types of loans, from mortgages to student loans to credit cards, and the more likely you are to receive favorable loan terms like low interest.
But loans aren’t the only way credit scores are used. Insurance companies, utility companies, landlords and even cell phone companies might check your credit to get a sense of how likely you are to pay your bills on time and, by extension, to decide what kind of contract terms you’ll qualify for.
Critics of the credit scoring system say it perpetuates economic and racial inequality and is biased against those without access to generational wealth. People of color tend to have disproportionately low credit scores and by extension are more likely to turn to subprime lenders that charge exorbitant interest rates and fees. Lower credit scores also mean fewer opportunities when it comes to homeownership, business loans and more.
There are also tens of millions of Americans who are effectively invisible to banks and other big lenders because they haven’t established the lines of credit — like credit cards, student loans or mortgages — necessary to generate a credit report and build a credit history. And without a credit history, it is extremely difficult to access mainstream lending services.
Insurers say rates could rise with credit score ban
Insurance groups are fighting the new rule in Washington. Three groups — the American Property Casualty Insurance Association, the Professional Insurance Agents of Washington and the Independent Insurance Agents and Brokers of Washington — filed legal actions earlier this month to prevent the ban from going into effect. In a lawsuit, the insurers argue that using credit scores to determine insurance premiums and coverage eligibility is justified because the scores are generally good predictors of future insurance claims.
They’re arguing that restricting insurers from using credit scores to calculate insurance rates is an overstep by the government that will restrict the free market and cause insurance rates to rise for more than one million consumers.
There’s some evidence to support that claim: One 2016 study by the Vermont Department of Financial Regulation found that a ban on using credit information to set car insurance rates would increase premiums for nearly 100,000 vehicles. The idea is that those car owners currently pay less than they would because of their good credit scores. If a ban were enacted, the study found that the median annual bump in premiums would be about $33 for that group.
Claire Howard, the American Property Casualty Insurance Association senior vice president, general counsel and corporate secretary, said in a statement that the new Washington state rule will be “particularly harmful to seniors on fixed incomes and those struggling to economically recover from the COVID Pandemic.”
How to get a higher credit score
While the fate of the new rule in Washington is not yet clear, lots of other states allow the use of credit scores when it comes to calculating insurance rates. If you’re worried that a poor credit score is driving up your insurance costs, there are a few steps you can take.
Start by making sure you’re paying all your bills on time. Timely payments are a major factor in your score. It’s also a good idea to try to reduce the amount of available credit you’re using (called your credit utilization ratio) to under 30%. Using too much of your credit at any given time can lower your score.
You might consider opting into a program like Experian Boost, which lets you add on-time payments to utility companies, phone companies and even streaming services to your credit report to shore up your score.
You can also look into a credit repair company. And remember, it takes a long time to adjust your credit. Don’t be surprised if your efforts don’t show up in your score right away.
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