Proposed Law Stops Auto Insurers Using Credit Scores To Set Rates

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Proposed Law Stops Auto Insurers Using Credit Scores To Set Rates Economic News you can Use

Credit Rating Borrowing Insurance Auto Insurance

March 26, 2019
Another Use for Your Credit Score

You probably know that your credit score affects the interest rates you'll pay for credit cards and loans. Did you know that your credit score could also affect your auto insurance rates?

It can in all but three states (California, Massachusetts, and Hawaii). Those three states have banned credit-based insurance scoring – the use of credit scores in determining auto insurance premiums. Rep. Rashida Tlaib (D-MI) would like to make that ban nationwide.

Rep. Tlaib is introducing a bill that would prohibit auto insurance companies from using a client's credit history to set rates for premiums. She claims that the practice discriminates against low-income Americans and compounds ethnic and racial discrimination.

We Use It Because It Works

Insurers use credit-based scoring for one basic reason – it accurately assesses risk. Separate studies from the University of Texas and the Federal Trade Commission (FTC) found that drivers with higher credit scores generally had fewer accidents and cost insurers less money in claims.

However, the FTC study also backs up Rep. Tlaib's claim. Scores were distributed differently among racial and ethnic lines, causing certain groups to pay more as a result. The report also says that the FTC couldn't come up with an alternative model that effectively predicted risk while reducing racial and ethnic differences.

Insurance is based on accurate risk assessment. Is it fair to ask insurers to ignore an efficient predictor because it affects certain demographic groups differently?

Rep. Tlaib would likely say yes.

Why Would Credit Scores Affect Safe Driving?

In a Financial Services Committee meeting earlier this year, Rep. Tlaib asked the CEOs from the three major credit reporting agencies (Equifax, TransUnion, and Experian) to comment on her proposal. The executives couldn't say how the information in a driver's credit report could be used to determine his or her risk.

That's not surprising, since the information in your credit report is not directly relevant to driving records. The FTC and Texas studies found correlation, but the causes are unclear. Does a low credit score infer poor judgment that would extend to driving? If so, why should we expect that to correlate to ethnic and racial differences?

Insurers may not care why a predictor works, as long as it works. Americans may reply that if the predictor squeezes underprivileged communities, lower insurance rates for some may not be worth the consequences for all.

It Pays To Shop Around

If credit-based insurance scoring is banned across the nation, insurers are likely to raise all rates to compensate for increases in collective risk while staying within state regulatory boundaries.

Not all auto insurers judge risk factors the same way. Insurers vary in their interpretation of risk in any given area and environment. By shopping around, you may be able to find an insurer that doesn't factor credit scores into your premiums as much as others – at least in your state.

A 2018 WalletHub study found that of the five major auto insurers (GEICO, Progressive, Allstate, State Farm, and Farmers Insurance), the average savings for excellent credit ranged from 20% with GEICO to 54% at Farmers. The average premium fluctuation in states that allow credit-based scoring ranges from 27% in Montana to 102% in New Jersey – and the maximum premium fluctuation reached a staggering 212% in the District of Columbia.

While you wait for Rep. Tlaib (or anybody) to offer you auto insurance relief, shop around to find the best rate you can under your current circumstances – and then work on improving your credit score to get an even better deal.

The Takeaway

Rep. Tlaib's bill still faces long odds of becoming law, thanks to a Republican-controlled Senate and a powerful insurance lobby. Unless you live in a state that bans credit-based insurance scoring, your credit score probably will affect your auto insurance premiums for the foreseeable future.

How big of a role will it play? That's up to you.

Shop around with insurers for the best rates you can receive now. Check your credit report for any signs of fraud or errors that could be dragging down your score and review your existing account balances for fraudulent charges. Correct any errors before you shop for a new policy. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.

Next, set up a long-term plan to improve your credit score and turn credit-based insurance scoring to your advantage. Make sure that all bills are paid on time, even if you're only paying the minimum. Keep credit usage low – aim for 30% or less of your limit in total and on any one card. Avoid opening multiple new lines of credit that could raise red flags with insurers.

Credit-based insurance scoring is just one more reason to keep your credit score as high as possible. How many reasons do you need?

Let MoneyTips protect your credit and your identity with a free trial.

Photo ©iStockphoto.com/blueflames

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