Insurance companies just got banned from using credit scores in this state

Officials banned insurance companies from using credit scores to set prices.

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a senior reporter and certified personal finance counselor at Policygenius, where he covers insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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Insurance companies in Washington won't be allowed to use credit scores to determine auto and home insurance prices as of June 20.  

Washington Insurance Commissioner Mike Kreidler said the ban would end what he called an "unfairly discriminatory process" that forces people who have been hurt financially by the pandemic to pay higher premiums. 

California, Hawaii, Maryland, Michigan and Massachusetts also restrict or ban companies from using credit scores to set home or auto insurance prices. 

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Why insurance companies use credit scores

There's a statistical correlation between your credit score and how likely you are to file a claim. Actuaries have found that people with higher credit scores tend to file claims less often, which means they're less expensive to insure, so they get to pay lower premiums. Many types of insurance use credit scores. (And FYI, the scores insurance companies use are slightly different from those used by your lender or credit card company.)

The American Property Casualty Insurance Association, an industry group representing home, auto and business insurance companies, said bans like the one in Washington would lead to higher prices for most drivers.

"Unfortunately, Washington consumers will become very aware of this impact as Commissioner Kreidler's regulations take effect and more than 1 million Washington consumers face double-digit increases in insurance costs," Jeff Brewer, a spokesman for APCIA, said in a statement.

Why some states have banned the use of credit scores

Kreidler, who did not return a request for comment, and those who want insurance companies to stop using credit scores, say the practice perpetuates racial and income disparities. An Urban Institute study found white households had higher credit scores than Black households, which helps contribute to the Black-white homeownership gap

The Consumer Federation of America, an advocacy group, conducted research showing Washington drivers with poor credit scores ended up paying more for auto insurance even if they had perfect driving records.

What you can do

Fabio Faschi, an auto insurance expert and operations manager for Policygenius, said the ban will change how insurance companies price risks in Washington.

"It makes it a great time for you to reassess your insurance as your alternative options may have improved," he said.

In other words, you should shop around. Switching car insurance policies can often yield a lower price. Read our guide to changing auto insurance companies to get started.

Image: Sumiko Scott / Getty Images