Tennessee Could Be the Next State To Outlaw a Questionable Car Insurance Practice
An investigation by FOX 13 in Memphis, Tennessee shows that the city’s poorest citizens are often paying the highest premiums on their car insurance. Experts say the disparity is a result of premiums being determined based on credit scores.
Determining insurance rates based on credit scores has long been linked to increased inequality in America. It’s why some states have already banned the practice and why FOX 13 thinks Tennessee could soon follow suit.
Tennessee could be the next state to ban using credit scores to help determine car insurance rates | Twenty20
Why your credit score can affect your insurance rates
It might seem odd that insurance companies use credit scores to determine premium prices. Usually, credit scores are used to project whether you can be trusted to pay back loans or purchase products over time through financing agreements.
Insurance providers collect as much data as possible to calculate risk and then determine their prices based on their findings. And studies show that drivers with low credit scores are more likely to be involved in car accidents. These accidents are, on average, more serious as well.
In other words, if your credit score is low, insurance companies are more likely to lose money by covering you. To make up for that potential loss, they will want to raise your premiums.
Depending on where you live and how bad your credit score is, you could pay double what someone with an excellent score, even if every other factor is the same.
How basing insurance rates on credit scores widens the wealth gap
It makes sense for insurance companies to base insurance premiums on calculated risk. It’s how they offer discounts to people who drive safely or drive less than others. Usage-based insurance is often touted as the fairest type of policy.
The problem lies in the link between some risk factors and income rates. When insurance companies assess risk based on factors outside the scope of their driving habits, their assessments can easily turn into discrimination.
To resolve the issue, California, Hawaii, and Massachusetts have already banned insurance companies from using credit scores to determine their prices.
Washington’s government implemented a temporary ban while it writes a permanent solution. FOX 13’s investigation could help push Tennessee to adopt similar legislation.