Credit scoring and home insurance
Credit scoring in most states in USA is a common enough practice undertaken by insurance carriers as a background check on people who intend to insure their homes with them.
Maryland homeowners receive discounted rates because of their high credit scores. Of late however, they have been facing a steep rise in the rates because of a new state law that prohibits using the credit scoring practice.
Change in laws and ban on credit scoring
Insurance carriers intimate customers of the change in premiums as their policies come up for renewal stating the reason as the ban on credit scoring. This is essentially a calculation undertaken using a customer's personal credit information and background to indicate how likely he is to file a claim or repay a loan. This new law has clamped down heavily on the insurers forcing them to cancel credit-based rates and group customers under broader measurements, such as the number of claims filed.
But the rise is not uniform for all policies. While some see hiked rates, for some others the rates may as well go down. Homeowners with higher credit scores have typically always received larger discounts on their policies, while those with lower scores have ended up paying more. However, rising national rates are pushing up the price for all homeowners.
Importantly the category of "preferred" customers will lose the 20 percent discount they were being offered because the insurance carrier would no longer be able to justify them through instances of payment-history, type of credit and percentage of new credit when fixing rates.
Rate changes for policies
Rate changes for individual homeowners may differ dependent on the amount of coverage on the home, deductible and discounts on the policy. Insurance companies would resort to credit scoring because credit history has always had a high correlation with the insured’s likelihood of filing a claim.
Effect on homeowners insurance
Homeowners insurance is already expected to climb 9 percent nationwide this year.
Maryland homeowners on an average pay $372 a year, which amounts to $231 less than the national average. Homeowners are advised to take necessary steps to lower some of the rising cost by taking on a higher deductible, consolidating insurance policies under one company, or making improvements such as smoke alarms and security systems. So far, Maryland is the only state to prohibit insurance companies from using consumer credit history when setting home-insurance premiums, though insurers can use credit scoring for automobile insurance.
This move by the authorities has come under fire from consumers on the grounds that credit scoring as a method to judge the credibility of an individual is said to discriminate against those earning low incomes.
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