Senate Bill 111passed on January 28 and was received by the General Assembly the following day. It is currently pending review by the Assembly Financial Institutions and Insurance Committee. The New Jersey government moves forward as pressure grows to curb unfair insurance practices across the country.
States are focusing specifically on the use of credit scores to set premium rates after the
Consumer Federation of America(CFA) released a report revealing that the practice unfairly penalizes lower-income Americans and contributes to systemic racism.
How credit scoring affects your car insurance
Credit scores are usually used to determine whether you can be trusted to pay off loans or buy products through financing agreements. Since you pay for your insurance policy before insurers cover you, it might seem odd that your credit score plays a role in setting your rates.
But insurance providers decide what you pay for insurance based on estimated risk, and, in 2007, the
Federal Trade Commission(FTC) reported that "credit-based insurance scores… are predictive of the number of claims consumers file and the total cost of those claims."
In other words, if you have bad credit, you are statistically more likely to have
car accidents, which means your insurance provider is more likely to lose money by covering you. To make up for that risk, the company will raise your rate—the lower your score, the higher the price.
Depending on your credit score and your state, you could pay more than twice what someone with an excellent score pays, even if both of you have clean driving records.
The state of credit-based insurance in America
New Jersey is not the only state trying to ban credit-based insurance. There are many states acting against the practice. According to
Newsweek, four states have already outlawed credit scoring for determining insurance rates:
Besides New Jersey, bills and/or temporary bans are also in process in the following states:
- Colorado (bill passed state Senate, in the House Health and Insurance Committee)
- Oregon (bill in committee)
- Washington (bill in committee with a three-year ban in place)
- West Virginia (in Senate committee)
Federally, New Jersey Rep. Bonnie Watson Coleman (D) introduced a bill to Congress called the PAID Act in February. If passed, the bill would outlaw the use of credit scoring for determining insurance rates in the U.S. It’s currently in the hands of the House Subcommittee on Consumer Protection and Commerce.
There are already limits on how your credit score can be used to set your insurance rates 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.
Navigating state car insurance laws
Car Insurance laws are very different from state to state. In Virginia and New Hampshire, you’re not even legally required to have auto insurance at all!
All this variety can make shopping for insurance intimidating. Luckily,
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