Those with low credit scores are not just scaring off lenders—even insurers tend to be wary when dealing with customers with poor credit.
The insurance industry is centered on the calculation of risk, so it only makes sense that carriers would attempt to adjust their premiums accordingly for each of their customers. Indeed, some lines of insurance—such as auto and homeowners—use credit-based insurance scores to determine the premium of consumers.
The practice of using consumer credit scores as basis for pricing insurance premiums is a divisive one, with critics saying that it could negatively affect both individuals and groups with poor scores. The practice has also been known to help decrease insurance costs, depending on the customer’s score.
A 2007 report by the Federal Trade Commission (FTC) that analyzed auto insurance premiums based on credit scores found that the use of scores “likely leads to African-Americans and Hispanics paying relatively more for automobile insurance than non-Hispanic whites and Asians.” It does not help that the former group is often associated with lower scores.
The same report, however, discovered that the use of credit scoring predicted risk for members of all groups in the same way, without any particular bias. Interestingly, the report also found that the credit scores used in determining auto insurance premiums could be used to accurately predict the likelihood of a consumer filing a claim.
The Arkansas Insurance Department also published its own report on how credit scores affect personal insurance in 2015. The department observed that for homeowners’ policies, the use of credit scores led to decreases in premiums for 57% of the consumers they surveyed. Across all personal lines of coverage, the department noted that more than 86% of the consumers surveyed with credit-based insurance scores reported lower or unchanged premiums.
While credit score-based insurance can be both a good and bad thing, several states have already taken steps to “protect” consumers from the negative effects of such a practice—with mixed results. According to Forbes, California outright prohibits auto insurers from using credit scores to determine premiums, This action may have hurt the state’s customers more, as the state is one of the most expensive in America for auto insurance. Massachusetts had recently banned credit-based insurance scoring in 2011, Forbes also mentioned.
