Poor Credit Hits Homeowners Hard When Buying Home Insurance, Report Finds | Insurify

Homeowners with low credit scores pay, on average, nearly $2,000 more annually for home insurance, according to a new report by the Consumer Federation of America (CFA) and the Climate & Community Institute (CCI).

The report weighs the impact of credit pricing against pricing based on local disaster risks, like hurricanes or hailstorms. Even when all other factors are the same among prospective policy buyers, those with poor or average credit scores end up paying much higher premiums, the report authors say.

Homeowners with FICO credit scores of 630 or lower pay, on average, $1,996 more per year than property owners with high credit scores, the report says. And those with average credit scores typically pay $792 more annually.

Where credit-based scoring hurts consumers the most

The CFA/CCI study found regional variations in the severity of what report authors call a "credit penalty." Pennsylvanians with poor credit face the biggest premium difference — 181% more annually, according to the report. Arizona, Oregon, and West Virginia had the second-highest differences, at 150% or more.

The only states that saw no "penalty" at all were California, Maryland, and Massachusetts. Those states prohibit the use of credit information in insurance ratings.

How insurers use credit information in pricing

Nearly every state in the country allows insurance companies to consider consumer credit history when setting home and auto insurance rates.

Insurers use credit information like payment history, outstanding debt, length of credit history, credit mix, and new credit applications to generate a credit-based insurance score. In turn, they use that score to help predict how likely an applicant or current policyholder is to file a home insurance claim. Depending on someone's credit-based insurance score, insurance companies can decide to charge policyholders higher premiums or even deny coverage altogether.

Insurers say credit-based insurance scores help them evaluate risk and charge policyholders appropriately, according to the National Association of Insurance Commissioners. In 2007, a Federal Trade Commission analysis backed up insurers' credit and claims correlation. The FTC study found that people with poor credit filed more claims and more costly claims.

Currently, only California, Maryland, and Massachusetts ban insurers from using credit to help price home insurance. Other states, like Illinois, limit how insurers can use credit information.

What's next: End credit use in insurance ratings, report advises

The report calls on all states to follow the lead of California, Maryland, and Massachusetts by banning insurers from using credit in pricing homeowners insurance.

"Credit score pricing has a disparate and unfair impact on certain groups of homeowners, including but not limited to those who are protected by the 1968 Fair Housing Act," the report says.

Credit-based scoring can also unfairly affect homeowners recovering from natural disasters, the report authors note. "Homeowners' credit scores often drop in the immediate aftermath of disasters, as many rely on credit cards to front costs that may be reimbursed by their insurance (such as finding temporary housing and buying necessities), to pay for uninsured losses, and due to job loss after disasters."

The report also calls on states to require greater transparency from insurance companies. Insurers, report authors state, should have to disclose exactly how they calculate insurance rates. Currently, insurers classify their pricing algorithms as "trade secrets," the report authors note.

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