Why use credit scores to set car insurance rates?
- Robert Hennelly
A nationwide survey of auto insurance quotes by Consumer Reports shows that credit history plays a bigger role in what car owners will pay for auto insurance than their driving record. "In the vast amounts of states, a poor credit history will have a greater impact on your auto insurance premium than a drunk-driving conviction," said Margot Gilman with Consumer Reports.
Consumer Reports' findings are based on the review of 2 billion price quotes from 700 auto insurers covering all 33,149 U.S. ZIP codes. Only three states -- California, Hawaii and Massachusetts -- prohibit insurers from factoring in a consumer's credit history in setting auto rates.
"People know what their FICO score is, but they have no idea that insurance companies are coming up with their own secret insurance scores based on cherry-picking 30 of the almost 130 elements that make up a consumer's credit score," Gilman said. "It is shocking to me that socioeconomic factors can count more than your actual driving record."
According to Consumer Reports, single drivers in New York state with good credit scores and clean driving records are charged $255 more for
auto coverage than they would be if they had an excellent credit score. In Florida, a motorist with a poor credit history but a spotless driving record paid on average $1,552 more than a driver with a DWI but an excellent credit score.
The reliance on consumer credit histories has been around for 20 years, according to auto insurance industry advocates who maintain the scores are a valid predictor of which consumers are most likely to file a claim.
"Credit and insurance scores measure how well individuals manage their money -- not how much money they make," according to a position paper on the industry's Insurance Information Institute website. "Actuarial studies show that how a person manages his or her financial affairs is a good predictor of insurance claims."
In the aftermath of the Great Recession, which saw millions of Americans out of work for prolonged periods, the use of credit scores for purposes other than determining creditworthiness become controversial. According to a report by the Society of Human Resources Management, 60 percent of employers it surveyed ran a credit check on job applicants.
Several states and municipalities have banned the practice.
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