Surprise! Your Credit Score Is a Huge Factor in Determining What You Pay for Insurance
Last updated November 2019
In the District and Virginia, insurers use credit scores to help determine premiums. (Maryland law prohibits homeowners insurance writers from using credit information in setting rates, but auto insurance companies can and do use credit scores.) Some companies also offer lower rates to college graduates and people in certain occupations. Insurance companies increasingly are charging customers very different rates depending on secret formulas based on data unrelated to their customers’ actual claims histories or risk of damage.
Using these complicated formulas, insurance companies—or credit bureaus, on their behalf—calculate an insurance score that is used to determine rates, or even whether to cover a home at all. The insurance formulas are not the same as those used by lenders (banks, mortgage companies) to calculate credit scores, but they draw on the same types of data and are increasingly opaque. The formulas vary from company to company, since different insurers (or scoring companies) weigh factors differently.
Whether insurers should use credit histories and other data to set rates is a hotly debated topic among the insurance industry and consumer groups like ours. Companies clearly charge far higher rates to customers with poor credit scores than they do to those with good scores.
With many companies, your credit score influences the rates you’re offered more than any other factor: The prices most companies offer customers with poor credit are double what they offer customers with excellent credit—with some companies, the poor-credit penalty more than triples their rates.
Our view is that all states should ban the use of credit scores and other financial information to set insurance rates, for several reasons:
- There’s increasingly an alarming lack of transparency. When insurance companies don’t have to disclose the formulas they use to set their rates—even though these formulas have a huge impact on the rates they charge—they circumvent the laws put in place by states to oversee an industry with a long history of racial discrimination and other abuses.
- By relying on credit reports and scores, the insurance companies are using data known to possess many errors.
- Mortgage lenders require borrowers to maintain homeowners insurance policies. The poor shouldn’t have to pay disproportionately large penalties to buy required coverage if they struggle financially.
- Another moral issue: The largest cause of bankruptcies in the U.S. is from paying for medical treatments for cancer and other illnesses. Should the sick and survivors have to pay double or triple to insure their homes?