Having a low credit score means paying more to borrow money or being unable to finance purchases entirely, but that’s not the only detrimental effect. In most states, insurers may charge you significantly more for your home or auto insurance if you have a low credit score.
Lawmakers in four states are seeking to put a stop to this practice as climbing rates strain the budgets of drivers and homeowners. People with lower scores wind up paying more — often significantly more — which consumer groups say is unfair and not reflective of risk.
Data from online insurance platform Insurify finds that drivers with poor credit pay a whopping 40% more for their car insurance; in some states, that gap is as wide as 60%. This adds up to more than $1,000 a year for drivers with checkered credit histories.
The Consumer Federation of America, a consumer advocacy group, documented an even wider gap: In a 2023 paper, the group found that drivers with poor credit often pay nearly twice as much for their car insurance.
There’s also a significant, although not quite as steep, correlation between credit quality and premiums in home insurance. Annual homeowners insurance premiums rose by 7% from a year ago, with the average homeowner now paying around $200 a month or $2,400 a year.
An NBER research paper found that homeowners with poor credit pay almost 25% more for their coverage than homeowners with excellent credit. Although living in a disaster-prone area can mean much higher premiums, the NBER found that homeowners’ credit scores were as much a factor as the home’s location.
A common practice, but unintended consequences abound
Currently, only a few states ban the use of credit data in setting premiums. California and Massachusetts prohibit using credit data to determine homeowners or auto premiums; Hawaii bans it for home insurance, and Maryland bans it for car insurance.
Lawmakers in a handful of other states are seeking to rein in the practice, as well. Bills have been introduced in statehouses in Iowa, New York, Oklahoma and Pennsylvania that would curb insurers’ use of credit data in pricing home and car insurance.
"Our state laws should protect consumers... as we work to make insurance more affordable and fair for all Oklahomans," state lawmaker Julia Kirt said in a press release announcing the legislation, one of a trio of bills targeting the high cost of insurance.
"This practice has a whole bunch of unintended consequences," Michael DeLong, research and advocacy associate at the Consumer Federation of America, tells Money via email. "It makes it harder for Black and Latino consumers to get coverage, and harder for low-income homeowners to get coverage, since they all tend to have a shorter credit history and lower credit scores."
From there, the problems can multiply, DeLong says: People who can't afford car insurance run the risk of getting into legal trouble if they get caught driving without it, while associated fines and fees exacerbate the economic toll. The impact on would-be homeowners is subtler, but even more damaging over the long term, because mortgage lenders require borrowers to carry homeowners insurance.
"They can't become homeowners, which makes it much harder for them to build generational wealth and assets," DeLong notes.
Industry professionals argue that credit data helps insurance companies do a better job assessing risk and charging accordingly. Bob Passmore, department vice president of personal lines for the American Property Casualty Insurance Association, an insurance trade group, told CNBC that credit scores “fairly and accurately assess an individual’s risk.”
And to be sure, using an underwriting model that includes credit data doesn’t disadvantage everybody: A 2007 FTC study about car insurance found that incorporating credit data would lead to lower premiums for roughly 60% of drivers, and higher premiums for the remainder.
The NBER paper that looked at the links between credit and home insurance prices found that people with lower credit scores were more likely to file claims after their home sustained damage. Researchers suggested this was because these homeowners might not be able to borrow money to make repairs on their own after a disaster. "Filing a claim may be the cheapest, if not the only way, to cover immediate unavoidable expenses," they wrote.
Consumer advocates say this is proof that using credit data can unfairly penalize people for financial conditions that might not be their fault.
But given its prevalence — for now, at least — in insurance underwriting around the country, homeowners and drivers tired of sticker shock should use the tools they have available to them.
"Improve your credit score, because that will lower your premium," DeLong advises. With a higher credit score, you can then shop around for the best car insurance and best home insurance rates.
"Don't hesitate to switch insurance companies," DeLong says, and ask if you can get discounts for actions like enrolling in paperless statements or prepaying premiums.
Ads by Money. We may be compensated if you click this ad.Ad
More from Money:
The Unexpected Factor That Could Be Driving Up Your Homeowners Insurance Rates
Homeowners Are Increasing Insurance Deductibles to $5,000 or More to Save Money
Sticker Shock: Homeowners Fed Up With Higher Insurance Rates and Slower Claims
