Having a low credit score can double your homeowners insurance cost, report finds

Chicago Sun-Times

A new report found that having a low credit score can double the amount a person pays for homeowners insurance, and the figure is higher for those in Illinois.The Consumer Federation of America and the Climate & Community Institute said Illinois consumers with a low credit score are getting a price quote of $2,122, or 120% more than someone with a high score, according to their analysis. It also affects people with average credit, who in Illinois are quoted an estimated 53% more than their high-score peers.The phenomenon appears across the country, the report found. Nationwide, the annual price quote for homeowners insurance for a person with a low credit score is $1,996 more than the price quoted for a similar homeowner with a high credit score — a 99% price increase, or almost double.The insurance industry uses "credit-based insurance scores," which include some elements of a traditional credit score. The industry maintains that these scores are useful in predicting the likelihood and severity of future claims.The considered a low credit-based insurance score to be a FICO score of about 630, an average score to be about 740 and a high score to be around 820.The "outsized impact" of credit scores on pricing means some homeowners with poor credit, who are living in safer areas, could pay more for insurance than people with excellent credit who are living in places prone to climate-related disasters, the report said."They're not actually pricing risk, and they should," said Abe Scarr, state director for Illinois PIRG, which has pushed for more regulation of the insurance industry.Researchers analyzed Quadrant Information Services' dataset of 608,105 "test quotes" from every ZIP code in the United States from August 2024. The test quotes were generated from insurance rate filings in all states except California, Massachusetts and Maryland, which don't allow the use of credit scores in determining homeowners premiums.To isolate the effect of credit scores, the researchers kept 157 other factors constant when generating the test quotes.The state with the largest disparity between insurance price quotes was Pennsylvania, where a typical homeowner with a low credit score can expect to pay 181% more for insurance than a similar person with a high credit score.Indiana had the sixth-highest disparity, where homeowners with low credit scores paid 128% more. Illinois was 10th with a markup of 120%.Robert Passmore, vice president of the American Property Casualty Insurance Association, pointed to other studies showing a link between credit-based insurance scores and a person's likelihood of filing a claim. He criticized the new report’s methodology as "flawed" because a consumer's final premium is often different from the price quote.Passmore said using credit-based insurance scores allows insurers to more accurately assess risk, "enhancing competition and resulting in savings for most drivers and fairer insurance rates overall."Illinois and Indiana are among 30 states that have laws requiring insurers to re-rate when a person's credit report is corrected, he said.Scott Holeman, spokesperson for the industry-funded Insurance Information Institute, said banning the use of credit scores could force insurers to rely too much on other factors like age, location or claims history, which might result in inaccurate pricing."Industry data has shown that credit-based insurance scores are strongly correlated with claim frequency and severity. Without them, insurers might lose a statistical tool that helps differentiate high- and low-risk policyholders," he said.The report comes a month after Bloomington-based State Farm, Illinois' largest insurer, said it was raising rates for homeowners insurance by an average of 27% in Illinois. The company blamed higher costs for rebuilding and repairing homes on inflation. That, along with more frequent severe weather, resulted in the company last year paying out $1.26 for every dollar collected.But some Illinois elected officials, including Gov. JB Pritzker, are skeptical and see it as an unfair and arbitrary price increase.The use of credit scores is also controversial in car insurance pricing. Consumer groups argue that it can penalize people who are good drivers but are struggling financially.Last month, Illinois Secretary of State Alexi Giannoulias announced plans to host a series of town halls on the use of nondriving factors in car insurance, as he pushes for legislation to more closely regulate car insurance rates.