For a decade now, all the major auto insurers have used a customer’s credit rating to some degree in determining premiums. They claim that it results in lower rates for “most” customers, and that the data prove that people with lower credit scores make more claims and for higher amounts. The FTC released a report this summer that validated the practice—but also confirmed an unpleasant truth critics have been saying for years: because a higher percentage of Hispanics and African-Americans have low credit scores, there’s a good chance they’re disproportionately affected.
Another article uses a side-by-side comparison that really shows the disparity: “Using credit scores is likely to mean that 64 percent of African Americans, 53 percent of Hispanics, 38 percent of non-Hispanic whites and 34 percent of Asians would pay higher premiums the FTC said.”
The practice was questioned at a House hearing on Tuesday, although it’s not clear whether anything useful was accomplished—the news reports have the usual routine of partisan soundbites that fall predictably on either side of the issue. California, Hawaii, Massachusetts and New Jersey have banned credit-based pricing, while many other states have passed laws that limit the extent to which insurers can rely on it.
“Credit-Insurance Link Debated” [Associated Press]
RELATED
“Congress looks into credit based auto insurance rates” [McClatchy]
“Caution! The secret score behind your auto insurance” [Consumer Reports]
(Photo: Getty)
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This pisses me off because I have good credit, been with the same insurance company for over 15 years and never paid a bill late and have not had an accident or ticket in at least 10 years, but my rate went up $100 last year because I had a student loan which lowered my credit score (which is still probably over 700).
When I called to dispute the rate change they said there was nothing they could do because the computer spits out a rate and that’s it, but they did say the student loan was the reason for the rate increase. Because I got a student loan (for graduate school), that some how makes me a less responsible driver?
The bottom line is credit scores are being used way too much and pervasively. Car insurance, job applications, what will be next?
@robotprom: Yes there is. I don’t know what kind of “index” it is, but there is such a thing. It is a shared index within the insurance industry that “rates” customers based on their past claims. If they file lots of claims and hit the insurance companies hard, they get a “score” according to that. This “score” allows the insurance companies to be wary of (or avoid entirely) certain people that will likely file lots of claims.
This has nothing to do with being a good driver or bad driver. It’s about CLAIMS, and how many/how often you filed them in the past.
Insurance companies are just trying to create algorithms to “calculate” a formula for potential customers. Credit score is just another data point for them to use to avoid issuing insurance to people that will hit them with lots of claims.
Personally, I don’t think they should be able to use credit scores for this, whether they find a correlation or not. But I am of the opinion that my (our) credit score (and credit reports) should be locked up for only me to show.
correlations like this just hurt responsible people. it is just a form of collective punishment. irresponsible people end up paying the rates they should and responsible people are just penalized because they happen to fall within certain demographics. the wrong people are being punished!
insurance companies are some of the slimiest entities in the world.
Wow… okay
couple of things.
1) Charging my driving record alone. This means that you can only charge for incidents after the fact. That would mean that the newest (and most dangerous drivers) would have the lowest rates. This is simply not a workable model.
2) People who have bad credit scores are bad with money. We know this, its what credit scores are design to reflect. People who have money issues are probably alot more likely to make claims on their insurance. IE someone who is good with money realizes that making a small claim on insurance will increase thier rates much more than the value of the claim over several years. The person with bad money skill makes this claim because they don’t see the long term money issues.
I dont know that I would say that people with poor credit are worse drivers. I dont think that is what the insurance company is saying either. Its saying they make more claims.
@Beerad: Well, as long as it was nothing personal.
Fine with me, credit score is not bad
I think it’s unfortunate that insurance companies work this way, but there’s a perverse logic to this.
Hypothetically, let’s say that your insurance agent has three variables to play with. Gender, past accidents, future accidents. Let’s just pretend that when they do their big regression analysis, it turns out your gender is the biggest contributer to future driving performance. My question is this: if it turns out gender is more predictive than your driving record, should they be allowed to use gender to determine your rates?
If you say yes, then NOTHING is off the table. Race, ethnicity, religion, credit score, taste in music, number of dance partners since Tuesday. EVERYTHING they can collect is just more data to feed into their system.
Turns out it’s moot, because although we don’t allow gender discrimination in the workplace, I’ve always paid a higher rate than my sister. If they can discriminate based on gender, why not based on race or religion or credit score?
@PatrickAustin: no, they shouldn’t be able to discriminate based upon that, but they are all powerful. i guess the difference is you can’t control your gender, race or ethnicity. you absolutely have complete control of your credit score. no excuses.
There are a couple of things that people need to remember here. Looking thru to comments the following seems to be ignored.
First : Credit Score is never the _only_ factor. Each company out there has anywhere for 10 to 40 criteria with credit being a single point of data. As far as I know there isn’t a single company that uses -just- credit score.
Second : Majority of the time, the companies also want to see stability. If you “suck up” one or two years and not jump around from best rate to best rate, your insurance _will_ drop. Alot of international grad students get gorged their first year. Why? No driving history in the US, despite where-ever they came from. After the first year passes rates across the board drops.
@ Eyebrows McGEE
I don’t think anyone is claiming that credit is the only tool being used besides those that wrote the newspaper articles, or the politicians trying to make an issue they can stand on.
Satrou was fairly close to the target I think, I’m just going to try and narrow it down. Think about paying insurance like an inverse mortgage on your house. Primary difference is that your car depreciates and becomes worth less while your house supposedly increase. So in paying out your X $’s a month, you are stocking up fake equity towards your car. Just like a normal mortgage you have over head of management, paper pushers, etc.
Now when you have an accident, there are certain level of statistics of how much its going to cost. The thing is unlike a real mortgage you don’t have a physical good that is still worth anything. All costs go towards either return to status quo _or_ replacement. That doesn’t even look at health issues for either party.
So that means in the long run each individual could cost them money. That’s a given and most people would agree with that.
What the insurance companies will want is coverage or verification that you will “pay them back” what they’ve payed out. (Back to the mortgage analogy)
And that’s probly where credit rating comes in. The more people that are clamoring for money for you, the consumer, the smaller the piece of the pie each company can get. And like it or not credit ratings provide a great way in tracking how well you can pay your bills.
It’s not in a companies interest when you go have an accident and then switch to someone “cheaper”. They’ve lost money on you. And the company you’ve changed to??? They know you’ll be likely to ditch them the same way. So they fleece ya for more up front in case you do to them like you did to your previous company, in order to cover the money they pay out. The more money they get, the ‘safer’ they feel. And that goes back to my 2nd point. Sticking with one company for awhile and it _will_ get better. You’re rates will go down, all other things staying the same.
I also bet but alot of states have socialized insurance rates for those that companies won’t even touch. Especially since most states require some form of insurance to drive. Where I live now, 3 bucks of each bill goes into a pool to cover those drivers. So those that are responsible are still paying for the irresponsible no matter who the company is.
@BoogerRed: Man, that’s a biter. I pay $600 every six months for full coverage insurance on my turbocharged German car and I’m a 23 year old male who got a speeding ticket in March.
@PatrickAustin: Actually, yes, that’s perfectly reasonable. The whole way insurance works is on a predictive model of behavior. If they can demonstrate that I’m more likely to be an expensive insurance risk based on whatever factor, then certainly that should impact my rates.
Note that they have to prove that there’s a legitimate predictive value. I strongly doubt that there’s any legitimate predictive value based upon race, for example. Credit score, quite possibly. Taste in music? Unlikely. Gender? Definitely. Etc, etc.
@BOOGERRED
I used to work for Allstate and they don’t randomly run credit at renewals, only at new business. I believe there was a case about 2 years ago where they changed their credit logarithm (they don’t use a FICO score, they use a proprietary formula that includes more than just “credit”) and everyone’s score changed, but you would have received a notice stating this is happening to everyone and there is no possible way your agent would have been able to override it. The agents have absolutely zero way to override anything in the system. They would have to call underwriting or rating and it’s actually illegal for anyone there to override anything having to do with the “credit score” because of the way insurance companies have to file rules and rates with the state. If your agent got your rate back down he either lied about one of your rating categories (said you drive less than you or something similar) or he gave you less coverage. Make sure you read your new policy when it comes in the mail so you know if you have the coverage you need.
To all those who are claiming this sounds like correlation instead of causation, that’s all the insurance companies need to charge a higher rate. They don’t have to prove that being very old or very young is the cause of accidents, just that people who are older/younger do have more accidents.
Hell no! I have bad credit but i’m a good driver and have never been in an accident.
The only thing that should be based on my credit score is………… wait for it……. revolving credit!
@harshmellow: Close, but not quite. It’s not an index per se. (FYI, speaking as a former insurance agent here.) It’s actually a database-when you apply for a policy with a new company, they can see any claims history you might have with other insurers. Based on that information plus your driving record and other factors (yes, credit included), each company determines their own rates.
@Beerad: even if race did have a predictive value, it could never be used, for obvious reasons. frankly, the anger toward using credit scores for insurance is still connected to race. the blurb in this article mentioned AA and hispanics as being disproportionately affected by it.
I’ve been hassling with Allstate about this for over a year. Their “algorithm” does not include the actual credit SCORE. Mine’s over 800, but the fact that we purchased windows & flooring using “same as cash” programs and purchased items at stores offering discounts for opening store credit accounts indicates “instability” according to my agent. We’ve saved hundreds of dollars in finance charges – but not enough to compensate for the 25% increase in our auto & home policies. Don’t shop around for a better mortgage or insurance rate either – they consider that instability too!
insurance should be rated on driving history not how much people are willing to lend you
Here’s some food for thought though. You can also make a statistical correllation that people with excellent credit have a vehicle that’s not a complete pile of shit (and belongs to the bank) and is worth repairing, and that the person with the good credit and good vehicle is going to file a claim to repair their “investment” People with bad credit tend to drive beaters that are paid off and don’t have comprehensive or collision. The only additional risk low credit is to the OTHER guy’s insurance company because most people with bad credit just carry basic liability.
My dad and I have been living by Dave Ramsey’s mantra of no debt. The newest car between the two of us is my 2000 F250 Superduty, the second newest is a 1998 Crown Victoria I bought at a county auction for $1500.
What’s hilarious is, we get RAPED for insurance because of no credit even though we don’t have Comprehensive or collision. If we were more likely to file a claim based on bad/no credit, everything would have full coverage. As of right now our insurance company bears ZERO RISK of us filing a claim on them since we have liability only. If you’re liability only, ALL that should factor in is your driving history.
@MrEvil: If you have NO credit card debt you might be presumed to be ALIEN, which algorithms probably say makes you a bad insurance risk.
Figures don’t lie – liars figure. Basically, I think insurance companies are in this to make money & no matter what we do, our rates will go up. They want to make the Katrina money back & since we need insurance to drive, we pay.
I have an 802 on my last self-check, and always get the discounted rates. Hence, I’m happy with the system. BUT! If my insurance company knew how I actually drove, they’d realize that the system doesn’t work to their advantage in my case (yeah, yeah, aggregated quantities and all that).
It would see that there is a correlation between claims and low credit, by the article. They are not causal in either direction. It seems likely to me that there is a cause of both: lower income. Cheaper cars–new or used–may need more repairs (hence the higher claims) and small accidents cannot be paid off in cash (which seems pretty common in my middle-class area, but would be too expensive for low-income households, and which would also result in higher claims); lower income households might also be more likely to use credit poorly and thus have a lower credit score.
Do you think that Urban/Minority/Youth get such great deals on things like;
Predatory check cashing, payday loans, mortgages, housing, car sales/loans, education etc.? And who could forget those absolutely fabulous rent to own furniture and appliance deals?
This whole argument is a prime example of how data (and it’s inherent misuses) can affect large swaths of certain groups.
Why don’t we correlate how poor credit histories also show an actuarial relationship to high blood pressure, kidney disease, stroke, heart attack, HIV and cancer? Would the data be wrong? Probably not. But it certainly would not be the right thing to do.
Some states won’t allow credit scores to be used to determine car insurance rates–like in California. I honestly don’t feel a credit rating should have bearing on someone’s driving ability. However, some insurance companies offer discounts to engineers, scientists, teachers etc . . . because statistically it has been shown that people in these occupations get in less accidents. I think if they can show people with higher credit scores get in less accidents, have less tickets, I could see them winning this case in a court of law.