The second targeted the use of credit information, education level, homeownership, and line of work for determining rates. It failed to pass on its third reading. The bills were rejected as pressure grows to curb discriminatory insurance practices in other states.
How credit score impacts your car insurance
The use of credit score to set rates is particularly under fire across the country after the
Consumer Federation of America(CFA) released their study showing how the practice unfairly penalizes moderate- and low-income Americans.
Normally, banks and businesses use credit scores to help decide whether to offer you loans or allow you to purchase products over time through financing agreements. Since you need to buy your policy before insurers will cover you, it might seem odd that insurance companies pay attention to credit scores.
But insurance providers set your insurance premiums based on calculated risk, and studies show that drivers with low credit scores are more likely to be involved in
In fact, the
Federal Trade Commission(FTC) already reported in 2007 that "credit-based insurance scores… are predictive of the number of claims consumers file and the total cost of those claims."
What does this mean for drivers?
In simple terms, if your credit score is low, your insurance provider is more likely to lose money by covering you. To make up for that potential loss, the company will raise your premiums—the lower your score, the more you pay.
Depending on where you live and what kind of credit score you have, you could pay more than double what someone with an excellent score, even if all the other factors are the same.
The state of credit-based insurance in America
Louisiana is only one of many states recently tackling legislation that would ban the use of credit scoring to set insurance rates. According to
Newsweek, four other states have already outlawed the practice:
Bills and/or temporary bans are in process in the following states
- Colorado (bill passed state Senate, awaits hearing from the House)
- Maryland ( bill recently withdrawn by its sponsor)
- New Jersey Senate (bill awaits hearing from insurance committee)
- Oregon (bill in committee)
- Washington (bill in committee; a three-year ban is in place)
- West Virginia (in Senate committee) There are already limits on how your credit score can affect your insurance in Oregon. Insurance companies can’t deny your application or refuse to renew it based on your credit score. Similar laws also exist in Illinois, New York, and Utah. Federally, Congress has introduced a bill called the PAID Act. The bill was introduced in the House in March and would outlaw the practice across the U.S.
Navigating state car insurance laws
Car Insurance laws change drastically from state to state. In Virginia and New Hampshire, you’re not even legally required to have
All this variety can make shopping for insurance complicated and scary. Fortunately,
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