US State Lawmakers Target Credit-Based Insurance Pricing

Lawmakers in Iowa, New York, Oklahoma, and Pennsylvania are reviewing legislation that would ban the use of credit-based insurance scores for homeowners and auto insurance. These scores are currently used by insurers to predict the likelihood of a claim, with lower credit scores typically resulting in higher premiums for the policyholder. Consumer advocates argue that the practice is fundamentally unfair, as it penalizes individuals for financial hardships—such as job losses or divorce—regardless of their actual driving record or risk profile. They contend that this creates a cycle where insurance becomes unaffordable for those already in financial distress. The financial disparity is significant. Research from the National Bureau of Economic Research indicates that homeowners with low credit scores pay 24% more for identical coverage than those with high scores. Furthermore, a report from NerdWallet found that drivers with poor credit pay an average of 69% more than those with good credit, noting that in some instances, poor credit can trigger a higher premium increase than a recent DUI. Conversely, the American Property Casualty Insurance Association maintains that credit-based scores are essential for accurately assessing individual risk to keep overall premiums low. The industry points to a 2007 Federal Trade Commission study suggesting that 59% of consumers would have seen their premiums decrease under this scoring system. Currently, the practice is banned for auto insurance in California, Hawaii, and Massachusetts, and for homeowners insurance in California, Massachusetts, and Maryland. In most other jurisdictions, insurers are prohibited from using credit scores as the sole reason for denying or canceling a policy, but they may still use them to determine pricing.