There's a Movement to End Credit Scores' Effect on Car Insurance, and It's Working
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In a perfect world, good driving would reward someone with lower premiums.
Unfortunately for many, bad credit scores can be a major factor in determining insurance prices and can often have a disproportionately negative impact on people of color.
With the help of state officials, calculating car insurance rates with credit scores may be coming to an end. According to NBC News, several states have either already banned this practice or are working to do so right now.
What does credit history have to do with car insurance rates?
People of color are disproportionately affected
Because insurance companies use factors like credit scores to determine prices, a driver with a clean driving record can still have a higher premium than a driver with multiple accidents on their record.
Critics argue that while insurance companies can’t directly ask about someone’s race, using credit as a marker could end up targeting people of color.
Building credit is not simply about a person’s wealth or ability to pay debt. This includes things like access to banking, a key part of credit building and having a higher credit score.
Studies have found, on average, white people tend to have higher credit scores than Black or Latinx people.
Nearly a third of Black Americans have no credit score at all, which is significantly higher than the number of white Americans who don’t have a credit score.
States working to eliminate credit scores from insurance rates
Some question why something that has nothing to do with a person’s driving has such a major impact on their insurance.
Using credit scores to determine car insurance rates was already controversial without even considering how it’s potentially systemically problematic. When viewed through the lens of how it potentially affects non-white people though, it’s even more of an issue.
Some states have already cracked down on the problem, including Hawaii, Massachusetts, and California. These states have banned the use of credit scores as a pricing factor for car insurance.
As government officials learn more about how using credit scores can negatively affect people of color, other states have also proposed legislation that would ban credit score-based insurance pricing.
Attention from the federal government and beyond
As conversations about racial equality have occurred, the issue of bad credit affecting insurance rates has even made it to the federal government.
President Biden has spoken about how Black families pay more for car insurance than white families.
Federal representatives have also introduced bills to prohibit using credit scores in insurance pricing. However, none of these bills have made it past the House.
While the movement may seem slow, states have shown that progress on the issue can be made. Individual insurance companies have also made strides to focus pricing on safe driving rather than factors like credit.
Insurance companies and government officials have recognized that this problem exists, and that’s the first step to solving it.