Texas Homeowners Insurance Rates Higher For Those With Poor Credit

Credit ratings are figuring more prominently in how much Texans pay for insurance. As a result, many policyholders with unfavorable ratings — particularly those with lower incomes — are being hit with premiums that can be more than twice as high as those paid by people with good credit scores.

The gap is particularly pronounced in homeowners insurance. Some of the largest companies are charging people with poor credit scores far more than customers with strong credit ratings.

A rate analysis by The Dallas Morning News shows, for example, that in several Dallas-area ZIP codes, Safeco Insurance premiums for homeowners with poor credit scores are nearly 2.5 times as high as those for customers with favorable scores. The average gap among the 34 largest companies is nearly 50 percent.

For auto insurance, the differences aren’t as dramatic, averaging 39 percent — although State Farm typically charges drivers with poor credit scores 51 percent more in premiums.

Minority and lower-income residents are more likely to have low credit ratings.

It’s legal for insurance companies to use credit scores in setting rates, and insurers maintain that the scores are a vital tool in accurately pricing auto and home policies. The objective, they say, is to make sure those who pose bigger risks pay higher premiums.

But consumer groups and civil rights advocates contend that the practice creates financial hardships for poor families and that credit ratings have little to do with the factors that drive the cost of auto and homeowners insurance.

“Credit scoring is designed to help insurance companies not provide coverage to people they don’t want to sell to, plain and simple,” said Alex Winslow of Texas Watch, a consumer group that tracks insurance issues.

“If you miss a credit card payment one or two times and your credit score suffers, that doesn’t mean your house is more likely to suffer from catastrophic hail damage,” he said.

Winslow said a report from the Texas Department of Insurance found a disproportionate effect on minorities. It said black and Hispanic drivers are “over-represented in the worst credit score categories and under-represented in the better credit score categories.”

Black consumers, according to the report, make up 2 percent of the policyholders in the best credit score range, and about 33 percent in the worst range. Hispanics account for 5 percent of the policyholders with the best credit scores, and 28 percent in the worst range.

Ninety percent of the policyholders with the best credit scores are white.

Mark Hanna of the Insurance Council of Texas, which represents the industry, said multiple studies show that credit scores are a reliable predictor of risks for insurers.

“It’s amazing how closely credit scores provide a true picture of how people maintain their homes and their cars,” Hanna said. “Nearly every insurance company uses credit scores to some degree to determine its rates, and they do so because the scoring methodology is consistent, reliable and highly predictive of future losses.”

He added, however, that companies use credit scores differently. “Some rely on them heavily, while others use them as just another tool for determining rates,” he said.

Hanna pointed to consumer protection safeguards in Texas intended to prevent the abuse of credit scores — for example, when a score has been adversely affected by high medical bills. Also, consumers are encouraged to shop around if they think a company’s premiums are too high, possibly because of credit ratings.

Credit scores, also used by banks and credit card firms, consolidate a consumer’s credit information into a single number. A score is based on such factors as the number and type of accounts a consumer has, late payments, collection actions, outstanding debt and the age of accounts.

But insurance companies and lenders rely on the scores for fundamentally different purposes. Banks and credit card companies use the numbers to evaluate creditworthiness; insurers use them to predict risk.

A review of rates in Dallas County indicates that credit scores have far more impact on homeowners’ premiums than the filing of a claim for fire damage in the previous three years. But in auto insurance, a driver with one at-fault accident in the previous three years is likely to pay almost as much extra as a driver with poor credit — except at State Farm, which charges more for a bad credit score.

Public Insurance Counsel Deeia Beck, who represents consumers on insurance matters, said the key for people with low credit scores is to avoid companies that assign a greater weight to the scores.

“You certainly don’t want to be with a company if it dings you on credit even though you have a good driving record,” she said.

“People can overpay on insurance for a long period of time if they don’t find out what factors companies are using to set their prices.”

In almost every legislative session, bills are filed to ban or sharply restrict the use of credit scores by insurance companies, but industry opposition has kept the measures from passing. Only a handful of states, California among them, prohibit insurers from using credit scores in setting rates.

 

HOW CREDIT SCORES AFFECT HOME INSURANCE RATES IN NORTH TEXAS

These figures from the Texas Department of Insurance represent annual rates for homeowners coverage for the six largest insurers selling policies in North Texas. Premium is for a 10-year-old brick veneer home valued at $200,000 that had no claims for five years. Different premiums reflect whether homeowner has good or bad credit rating.

 

	Allstate	Farmers	Liberty	Safeco	State Farm	USAA
North Dallas (75244)
Good	$1,461	$1,791	$2,197	$1,901	$2,984	$1,277
Bad	$2,022	$2,199	$3,732	$4,576	$3,525	$1,570
South Dallas (75215)
Good	$894	$1,650	$2,168	$1,742	$2,984	$1,493
Bad	$1,296	$2,120	$3,692	$4,195	$3,525	$1,837
Arlington (76001)
Good	$1,488	$2,227	$2,527	$1,844	$3,145	$1,480
Bad	$2,043	$2,682	$4,350	$4,437	$3,714	$1,802
Duncanville (75116)
Good	$1,016	$1,822	$2,189	$1,742	$3,286	$1,390
Bad	$1,431	$2,265	$3,732	$4,195	$3,882	$1,700
Garland (75040)
Good	$1,003	$1,791	$2,210	$1,742	$2,984	$1,345
Bad	$1,396	$2,199	$3,791	$4,195	$3,525	$1,655
Irving (75061)
Good	$1,461	$1,791	$2,197	$1,742	$2,984	$1,463
Bad	$2,022	$2,199	$3,732	$4,195	$3,525	$1,801
Plano (75075)
Good	$1,486	$1,841	$2,593	$1,531	$3,140	$1,321
Bad	$2,044	$2,258	$4,576	$3,683	$3,709	$1,599
Richardson (75080)
Good	$1,003	$1,791	$2,210	$1,742	$3,286	$1,345
Bad	$1,396	$2,199	$3,791	$4,195	$3,882	$1,655

SOURCE: Texas Department of Insurance