A growing number of U.S. state lawmakers are challenging a long-standing practice in the insurance industry: using consumers’ credit history to determine premium costs. Critics argue that this method can unfairly increase prices, even for individuals who pose minimal risk.
Legislative proposals are currently under consideration in several states, including Iowa, New York, Oklahoma, and Pennsylvania. These bills aim to restrict or completely prohibit insurers from factoring in credit history when setting rates for auto and homeowners insurance policies.
Insurance companies rely on what are known as credit-based insurance scores to estimate the likelihood that a policyholder will file a claim. Lower scores are typically associated with higher perceived risk, which often results in higher premiums. This can happen regardless of a person’s clean driving record or otherwise low-risk profile.
Consumer advocates argue that this system places an unnecessary financial burden on many individuals. They point out that people with lower credit scores may end up paying significantly more for coverage, even when their actual risk level does not justify the higher cost. In some cases, insurance becomes less affordable due to this pricing model.
Only a handful of states have taken steps to ban the use of credit history in insurance decisions. California, Hawaii, and Massachusetts prohibit it in auto insurance, while California, Massachusetts, and Maryland restrict its use in homeowners insurance.
In most other states, insurers face certain limitations. They generally cannot rely solely on credit information to deny coverage, cancel a policy, or raise rates. Additionally, many states require companies to inform consumers when their credit data has influenced an unfavorable decision.
The insurance industry, however, defends the practice. Representatives argue that credit-based scoring helps assess risk more accurately and allows for fairer pricing overall. Removing this tool, they claim, could lead to less precise rates and potentially higher costs for many policyholders.
Research on the impact of credit-based insurance scores shows mixed outcomes. A 2007 study by the Federal Trade Commission found that while some consumers would see lower premiums when credit data is used, others would experience increases.
Still, the gap in pricing can be substantial. Studies indicate that homeowners with low credit scores may pay about 24% more than those with high scores for the same coverage. For drivers, poor credit can result in premiums that are roughly 69% higher on average compared to those with good credit.
Supporters of reform also highlight that credit scores can be affected by circumstances beyond a person’s control, such as job loss, divorce, or financial hardship. This has fueled ongoing debate about whether credit history is a fair and appropriate factor in determining insurance costs.
