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States ban credit scores affecting auto and home insurance

Is it fair to charge higher auto and home insurance premiums because someone has a low credit score?

A new rule in Washington state will ban the practice, joining a handful of other states that have similar bans. But the insurance industry is fighting back, arguing that the ban could actually force many customers to pay higher premiums.

Washington’s new rule aims to prevent people with poor credit from facing higher rates for their home, auto and renters insurance — especially during the pandemic, which has disrupted the finances of millions of Americans. The rule is expected to go into effect March 4 and last until federal and state pandemic financial protections end or for three years, whichever is longer. The state insurance commissioner said he would work to make the ban permanent.

Washington argues that using credit scores to calculate insurance premiums is unfair. The state insurance commissioner noted that people who struggle financially (and end up with low credit scores) often fall victim to circumstances beyond their control, such as unemployment, unexpected medical expenses, and natural disasters.

A 2020 to study by the Consumer Federation of America found that good drivers in Washington state with bad credit scores (FICO considers a score below 580 to be bad) paid 79% more for their mandatory auto insurance than drivers with excellent credit. “I just don’t think it’s fair for good drivers to punish them if they’ve had credit problems,” Washington Gov. Jay Inslee said. reported by the Associated Press.

A few other states have bans or restrictions similar to Washington’s new rule, including Hawaii, California, Michigan, Massachusetts and Maryland.

How are credit scores used?

Credit scores are used by lenders to assess the risk of lending you money. The higher your score, the more likely a lender is to consider you a good candidate for all types of loans, from mortgages to student loans to credit cards, and the more likely you are to qualify for credit terms. favorable loan like low interest rates.

But loans aren’t the only way to use credit scores. Insurance companies, utility companies, landlords, and even cell phone companies can check your credit to get an idea of ​​how likely you are to pay your bills on time, and by extension, to decide what kind of terms contracts for which you will be eligible.

Critics of the credit scoring system say it perpetuates economic and racial inequality and is biased against those without access to generational wealth. People of color tend to have disproportionately low credit scores and, by extension, are more likely to turn to subprime lenders who charge exorbitant interest rates and fees. Lower credit scores also mean fewer opportunities for home ownership, business loans and more.

There are also tens of millions of Americans who are effectively invisible to banks and other big lenders because they haven’t established the lines of credit — like credit cards, student loans, or mortgages — needed. to generate a credit report and establish a credit history. And without a credit history, it is extremely difficult to access traditional loan services.

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Insurers say rates could rise with credit score ban

Insurance groups are fighting the new rule in Washington. Three groups – the American Property Casualty Insurance Association, the Professional Insurance Agents of Washington and the Independent Insurance Agents and Brokers of Washington – filed lawsuits earlier this month to prevent the ban from taking effect . In a lawsuit, insurers argue that using credit scores to determine insurance premiums and eligibility for coverage is justified because scores are generally good predictors of future insurance claims.

They argue that preventing insurers from using credit scores to calculate insurance rates is an overreach on the part of the government that will restrict the free market and drive up insurance rates for more than a million people. consumers.

There is evidence to support this claim: One 2016 by the Vermont Department of Financial Regulation found that a ban on using credit information to set auto insurance rates would raise premiums by nearly 100,000 vehicles. The idea is that these car owners are currently paying less than they would because of their good credit ratings. If a ban were enacted, the study found that the median annual premium increase would be about $33 for this group.

Claire Howard, senior vice president, general counsel and general secretary of the American Property Casualty Insurance Association, said in a declaration that Washington state’s new rule will be “particularly harmful to seniors on fixed incomes and those struggling to recover economically from the COVID pandemic.”

How to get a higher credit score

While the fate of the new rule in Washington is still unclear, many other states allow the use of credit scores when calculating insurance rates. If you’re worried that a bad credit score will drive up your insurance costs, there are a few steps you can take.

Start by making sure you pay all your bills on time. Timely payments are a major factor in your score. It’s also a good idea to try to reduce the amount of available credit you use (called your credit utilization ratio) to less than 30%. Using too much credit at one time can lower your score.

You might consider going with a program like Experian Boost, which lets you add one-time payments to utility companies, phone companies, and even streaming services to your credit report to shore up your score.

You can also turn to a credit repair company. And remember, it takes a long time to adjust your credit. Don’t be surprised if your efforts don’t show up in your score right away.

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