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Credit Scores May Dictate Insurance Premiums

It is a little known fact among consumers that credit information has become an important factor used by insurance companies to determine what their customers pay for auto and homeowners insurance. This is just another reason for you to obtain a free credit report, which you are entitled to under the Fair Credit Reporting Act (FCRA), because your credit information is used in ways you might not expect.

The validity of insurance companies use of credit scores to justify rates for premiums has been called into question by consumer advocacy groups. Insurance companies assert that credit scores are a predictor of the level of risk that the insured poses for making a policy claim. However, research has shown that there is a high correlation between credit scores and race, thus making credit worthiness a proxy for race in determining insurance rates.

Under the FCRA, the Federal Trade Commission (FTC) was charged with determining how credit based insurance scoring affected the availability and affordability of insurance. The FTC study showed that on average, these insurance scores were lower for Latino and African American consumers. However, even though the study showed a correlation between credit scores and insurance losses, it did not prove a causal relationship. It would be the same as showing that there is a relationship between eye color and insurance risk, and insurers are not allowed to do that. Even so, the FTC sided with insurance companies on the use of credit based scoring.

Consumer lobbyists have called for a ban on credit based insurance scores citing that the FTC study is flawed, and that the U.S. General Accountability Office should do another review. But, in the mean time credit based scoring is still widely used by insurance companies. Since what you pay for insurance can be affected by your credit information, you should educate yourself about what is in your credit report. There may be inaccurate information in your credit report that needs to be corrected, or you may be the victim of identity fraud without even knowing it. But, you will not know unless you call to get your free report.