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 significantly more for 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 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 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 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.
State Efforts to Curb the Practice
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. Bills have been introduced in Iowa, New York, Oklahoma and Pennsylvania that would curb insurers’ use of credit data in pricing home and car insurance.
State lawmaker Julia Kirt said: Our state laws should protect consumers as we work to make insurance more affordable and fair for all Oklahomans.
Michael DeLong, research and advocacy associate at the Consumer Federation of America, said the practice 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.
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.
Industry professionals argue that credit data helps insurance companies do a better job assessing risk and charging accordingly.
Consumer advocates say using credit data can unfairly penalize people for financial conditions that might not be their fault.
Improve your credit score, because that will lower your premium. With a higher credit score, you can shop around for the best car insurance and home insurance rates. Don’t hesitate to switch insurance companies, and ask if you can get discounts for actions like enrolling in paperless statements or prepaying premiums.