Should Car Insurance Rates Be Based On Your Credit Score?

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)

Comments

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  1. roche says:

    Let me get this straight, credit ratings are now racist?

  2. NoThru22 says:

    I’m not touching this one with a ten foot pole.

  3. LostDog says:

    Credit score should be used for NOTHING but lending money. Using it for other purposes can lead to turning away of responsible clients.

    All that is being done by this is letting a debt based society drive the motivation behind our economy. That turned out well for the sub prime mortgages, didn’t it?

    My family’s goal is to have a credit score of ZERO.

    Currently our only debt is our mortgage. That will be paid off in about 10 years (if not sooner). We have a nice stockpile of emergency cash in the bank. Why would a company turn away our business (and by charging us higher rates for being fiscally responsible they are turning us away…) because we live within our means and are responsible?

  4. warf0x0r says:

    Lol, love the picture took me a while to get it. And I would love to explain how credit ratings don’t really work the same ways for different “demographics”, but I’m not touching that one with a twenty foot pole… at least not in this setting.

  5. rdm says:

    No, you should not be charged more for insurance based on credit rating. That’s what credit cards, mortgages, loans, etc are for.

  6. Javert says:

    Allow me to pull a ten foot poll out of my bag…

    I assume that the ‘theory’ of this is that if you are responsible with one thing, ‘money’, you will be responsible in all things, such as driving. And if anyone can offer any other explanation (excuse?) for this practice, please let me know.

    The question that stems from this and is actually independent of my theory is one of a corralation of data…can it be shown, one way or the other that there is/is not a relationship?

    On the off chance that there is, then what is the big deal? Insurance is all about gambling risk assessment. You have to work with the data you have.

    Of course, if this is not true, WOW…what a scam.

  7. No, credit ratings are straight-up factual, and they are also proven to accurately predict the number of claims and the amount of those claims a customer will make. From a completely logical, every-man-for-himself standpoint, it makes perfect sense to use them.

    But if certain groups have historically had lower credit scores, then unless you think that credit worthiness is genetically determined, it’s possible that this statistically-accurate practice will disproportionately effect more members of those groups. So what seems a perfectly reasonable practice might be less fair if applied to a market that’s not completely balanced, where every consumer isn’t born into the same set of conditions.

    Personally, I think the question to ask is why credit scores and insurance claims are linked: are people with low credit gaming the system more? If so, why? Could it be that both things are caused by another factor, like income level, education, etc.?

    Fun Friday topic!!!

  8. *my “No” comment above was a direct response to the first comment by Roche. I should have clarified.

  9. rhombopteryx says:

    It’s the same old (lame old) correlation vs. causation crap. It’s hard and expensive to figure out which driver is a higher risk, but insurance companies can get a super-cheap 1st approximation of whether someone is in a “category” of high risk by looking at another category of risk – credit risk. That doesn’t make it fair or right. Past driving record is a better indicator, on the spot driving test might be better still, but that’s expensive. Hell, shoe size probably correlates with risk, but if insurance companies put that out and the FTC obediently said “yup, it correlates” people would still, rightfully, laugh them out of the room. Credit scores don’t indicate risk, they correlate with risk!

  10. cnc1019 says:

    @JAVERT… Insurance companies make a lot of assumptions based on small facts that they know. Such as guys suddenly become better drivers when they turn 25 (since that is when we get our premium discount) or that everyone who gets married is a better driver than when they are single.

    Probably going to sound racist, but I don’t have a whole lot of sympathy for people with bad credit (no credit or young credit is a different issue). You made a promise to pay someone and when you don’t you should be punished for it. Responsibility and Accountability have gone in the shitter in today’s society.

  11. B says:

    I don’t understand how bad credit makes somebody a bad driver, and for that reason, I don’t think credit scores should affect car insurance premiums. As for a link between credit scores and the number of claims a customer makes, that sounds to me like correlation, not causation.

  12. iMike says:

    Why should I pay more for my insurance because someone else is more irresponsible than my (risk) peers?

  13. target_veteran says:

    @Javert:

    The theory isn’t just being responsible in multiple areas. I know a lot of fiscally responsible people who drive like maniacs. What probably happened is that the underwriters started looking for new data points a few years back and discovered a strong correlation between a person’s credit score, number of claims filed, and average cost of those claims. Since insurance rates are all based on how much risk you represent to the company, this means that people with better credit are less likely to be a risk. In a way, it’s no different than age, school grades, income, or any of the other dozens of things that go into factoring insurance rates. Studies show that students that get better grades tend to be better drivers. Studies show that young drivers tend to be at fault for more accidents.

    The race thing is just rediculous attention whoring. Here’s what it should really say:

    X number of people have a low enough credit score to be affected by this policy.

    Of those people, Y are white, Z are African American, P are Hispanic, Q are Asian, etc.

    Y/total white population= Y% of whites will pay more because of this.

    Z/totatl black population = Z% of blacks will pay more.

    Unless someone can argue either that:
    A) Credit scores are inherantly rascist,
    B) The insurance companies specifically enacted this because of disproportionate effects,
    I don’t see how anyone could see racism here. It’s a simple forumla: raise credit score, lower insurance rates. They don’t care what you look like, just what the number is.

  14. Saboth says:

    Lol how many people know a person that you are actually scared to ride with because they have no idea how to drive, yet they have a perfect credit score? My ex gf talking on her cell while driving would be a good example. Anyhow, I believe insurance rates should be based solely on driving record. Not age, sex, color, credit scores, blah blah. Here I am, a perfect driver, with no tickets, no accidents EVER, and I have to pay more insurance than my gf who has multiple tickets and accidents, simply because she is a girl, and I am a younger male. Ridiculous.

  15. projoe1979 says:

    I don’t think your credit score should be used for anything let alone your car insurance. Until they take the veil of how the score is actually calculated and stop making it so you have to pay to find out what the number is it shouldn’t have any bearing on your life.
    Your driving record should be what determines your rate. Not a credit score, not sex, not age.

  16. crnk says:

    A little bit of a jump here for me….I missed how credit scores and race tie together….

    I think it would be more hogwash to try to add race as a factor to adjust premiums down based on average scores for your race. Honestly, this policy is race neutral while working to provide a benefit for those most predictable.

  17. Beerad says:

    Credit score seems to be a handy indicator of safe driving behavior (or at least lower overall risk). If insurance companies can use this to reasonably ease their actuarial risk assessments, then why not?

    The first-level application is not racist at all. It may disproportionately affect minorities, but not because they’re non-white, because they have disproportionately bad credit. It obviously puts a heavier burden on those with bad credit, but if that’s the same group that statistically has more auto accidents…

    However, there is an argument to be made that credit score isn’t a “fair” correlation to use, as minorities may not have had the same chances to build up good credit, etc., but I think it’s a hard argument to make in our credit-happy society.

  18. BoogerRed says:

    I have spotty credit because of a medical crisis in my family. Drive a mini-van, and have never in 17 years of driving, including 6 of those years in a tractor trailer, had an accident, or ticket. Yet, Allstate insurance tried raising my premiums from $425 twice a year to $656 twice a year. And I’m a white male. Race in my opinion, is just collateral damage. My agent overrode the “system” and locked in my same premium which I feel is fair for full coverage on a mini-van.

    The whole argument however, I feel is flawed. When I first came back to the states after three years overseas, I went through State Farm who wouldn’t even give me a quote, Geico, who was outrageous, then to Allstate who gave me the rate I have now. Did they let me in at the start just to jack me later? Maybe. If this happens to anyone I highly suggest talking to your agent. Show them you are not a claim filing fraudster. You might have the same luck I did.

  19. target_veteran says:

    @iMike:
    Because your insurance company doesn’t look at you, they look at large groups of people who share your characteristics. Based on that information, your X% likely to result in a claim. It’s all cold, hard numbers based on general probabilities of large groups.

  20. Beerad says:

    @Saboth: But the simple truth is that insurance costs are legitimately based on a LOT more than simply your driving history. Where you live, whether you own a high-theft vehicle, age, etc. To say that “it should just be based on driving history” discounts a world of statistical analysis and would probably bankrupt every auto insurance company.

  21. remusrm says:

    is all right charge us all more, and when will everyone realize they are more and more enslaved… before it used to be egypt on jews, whites on blacks… now is coorporations on everyone… funny thing is they make laws and they profit from this, but does the money benefit anyone besides an entity?

  22. rmz says:

    It’s the insurance companies’ fault for wanting to pigeonhole people into neat little “demographics” such as age, race, marital status, or gender, but if these people want to complain that their rates would be unfairly affected, they ought to get in line behind every safe 18-25 male drive in the contry.

  23. crnk says:

    @B: @projoe1979:
    There are studies that indicate a pretty strong tie to credit (and sex and age) and the number and cost of accidents. Tell me how a 20 year old male who has been irresponsible with his credit cards but still drives his modified civic is the same risk as my mother driving the same car (50, female, no accidents, 1 lifetime ticket, and driving for almost 35 years). Just because someone HASN’T had anything on the driving record indicates NOTHING.

  24. dwarf74 says:

    There’s a very strong correlation between credit score and losses. It may not seem to make sense – and it might not – but simple correlation is enough to encourage insurance companies to use it. It’s very similar to a good student discount; actuaries found a strong correlation between good grades and safe driving, and therefore give a discount for good grades.

    Yes, of course there are people with good credit scores who are bad drivers and bad credit who are good drivers. They’re outliers though; a correlation doesn’t require that every member of a population follow the same trend line.

  25. @Javert: “can it be shown, one way or the other that there is/is not a relationship?”

    There’s a correlation, but the problem is that (as others have noted) there’s nothing INHERENT in being responsible or irresponsible with money that makes you responsible or irresponsible as a driver. So some people who are very poor drivers can get excellent rates, and some people who are very GOOD drivers can’t get any insurance at all.

    Around here the complaint is not that the credit scores are being used; it’s that companies may use them as the ONLY tool for evaluating someone’s insurance risk, and since Illinois is a mandatory insurance state, that effectively locks poor people out of driving (because they have bad credit because they are poor and they get socked with outrageous insurance rates because of their bad credit, which they can’t afford to pay, so they can’t drive, so they can’t work …)

    It’s sort-of the same problem where people who don’t use credit cards and are very fiscally responsible can’t get mortgages because they don’t have a “credit history.” It’s not that using credit history to assess mortgage risk is BAD, it’s just that there should be an alternative method for when that system fails, as it obviously sometimes will.

    (It seems from what I’ve read that complaints are more vigorous in other places, so the problem may be larger or different elsewhere.)

  26. othium says:

    I hate paying for insurance on my car. My credit is not so hot, and this means I will have to pay more because of it? I have never had a traffic ticket or accident. This story put a damper on my Friday…bummer.

  27. hellinmyeyes says:

    I think this enters into the realm of employers checking credit scores before they hire applicants. They figure that someone who’s having money problems is prone to selling the company’s secrets for a quick buck or has an unstable life that will lead to on-the-job troubles.

    By that same token, I imagine that a lot of the credit-unworthy customers are quick to do the “OH my neck hurts!!!!” after an accident and bilk the insurers out of shloads of money. It’s not so much about credit score -> safe driving as much as credit score -> how much insurers pay out per accident. I imagine a lot of genuine statistical research is out there (privately, of course) to back this up.

    This is exactly why to shop around. Some agents will work with you based on individual circumstances. If they know that you had a bankruptcy but you are indeed an accident-free, safe driver, they will deal. You need to shop, and you need to ask. In most reputable companies, there is quite a bit of circumstantial wiggle room for what you pay.

  28. robotprom says:

    isn’t there a reporting system already set up to monitor your insurance claims and driving record? Why don’t the insurance companies use that one, or does that not allow them to bilk customers?

  29. hellinmyeyes says:

    I should add also that this might fall in the realm of “call and see what they can do for your rate”, same as calling the credit card company to ask for a lower interest rate. Give it a try; I’ve haggled with my agent a couple times to my advantage.

  30. IRSistherootofallevil says:

    Credit rating=/=driving risk. Period. Case closed.

    Credit rating is a bad indicator of credit risk, let alone any other risk. The scores are rigged so that you can’t shop around for different credit cards (you don’t know what the exact terms and conditions are until you apply and are approved), thus limiting choice.

    I don’t have an excellent credit score, but I never had an accident, and had one speeding ticket. That’s it. Compare that to people who are 20 years older than me that get speeding tickets on a monthly basis.

  31. I’m just surprised they don’t use driver’s tests in considering your car insurance rates.

  32. LostDog says:

    The insurance company that does manual underwriting and research gets my dollars. If I have a low credit score because I don’t have a credit card or borrow money doesn’t mean I’ll let a pen pusher somewhere charge me more…

  33. IRSistherootofallevil says:

    When my mom bought her lexus though, Allstate tried to raise the insurance rate from $550 every 6 months to $900 every 6 months. We threatened to move to Geico, and the rate came down to $600, which was about as much as the Geico quote. What assholes. If they think for a second that people won’t move insurance companies over rates, they’re sadly mistaken.

  34. NoWin says:

    “Credit score seems to be a handy indicator of safe driving behavior”….

    Credit score seems also to be a handy indicator that someone had a marriage go south and get alimonied up the ying-yang (or the other spouse doesnt see a penny of the alimony agreed to in order to support a house on her basic wages), or lost one’s house because both spouses jobs went to (insert foreign country of choice), or the kid needs major back surgery not covered by BC, or etc etc etc

    Insurance should be based on driving record, and the filings and claims of that residents city or town.

  35. Beerad says:

    @Eyebrows McGee: “There’s nothing INHERENT [about your credit score]… that makes you responsible or irresponsible as a driver.” But that’s obviously true of being a young male driver, or owning a Maserati, or a world of other things that factor into your insurance.

    And the exact complaint (okay, as determined by my unscientific sampling of outraged Consumerist readers) seems to be that credit scores are being used at all — as the McClatchy article points out, “Insurers typically give more weight to factors such as an individual’s driving record, the type of vehicle they own and the area where the car owner lives.”

    Since insurance companies can’t really say “Well, okay, we’ll just let each driver have the same affordable insurance for several years until there’s enough individualized data to review their likelihood of filing a claim”, they need to come up with reasonable alternative measures. Credit score seems to be one such measure.

  36. Beerad says:

    @NoWin: Okay, here’s the confession. I’m not a statistician or an actuary. But I bet you aren’t either. And the insurance companies hire hundreds of these folks, whose entire job consists of running risk analysis based on different factors and determining how you can predict which customers are likely to incur claims. Sure, it’s not perfect – these people are mathematical analysts, not psychics, but it works pretty well.

    Sure, you can come up with an anecdote about how credit score means whatever else, but that doesn’t mean that the statistical model doesn’t work. And if you’re one of those “hey, I’m a good driver I swear!” folks with bad credit, then explain that to your insurance agent, and shop around. Insurance companies, believe it or not, are not interested in weeding out “folks with marriage problems” unless they also happen to be “folks who are statistically really likely to rack up huge insurance costs.”

  37. @Beerad: If you read my entire post, you’ll note that I said that where *I* live the complaint isn’t that it’s being used — there is a correlation, just like there’s a correlation between being under 25 and having accidents — it’s that it may be the ONLY thing used, and that locks entire groups of people out of insurance in an insurance-mandatory state.

    Are you just responding to that one single sentence in my post because you wanted to make the point about how other correlations in terms of insurance risk aren’t universally true for all members of the category? Because otherwise I can’t really figure out what your post had to do with mine.

  38. B says:

    @crnk: You’re clouding the data by tying credit score to unrelated variables. Show me why your mother is a better driver than another 50 year old mother with a spotless record who’s carrying lots of credit card debt, and then I’ll be convinced.

  39. forever_knight says:

    why not use credit score? if we’re going to eliminate this practice then we also have to eliminate the good student discount, male-female difference in cost, age difference in cost, and so on. you know, because of the disparities.

    credit score is unique in that is it a direct result of the actions you take throughout life. it’s not dependent upon income. you can make 10k a year and still have a great credit score. likewise, you can make 150k a year and have a shitty credit score. credit scores are a measure of responsibility. now everyone can build their credit score by paying their bills on time, all the time. people that don’t follow this simple rule are punished in MULTIPLE ways, not just higher insurance premiums. these folk get higher interest rates on everything.

    it’s stupid to whine about this practice. it works and gives everyone an equal chance to succeed or fail.

  40. iMike says:

    @target_veteran: Exactly my point. Why should my risk pool be expanded to include others who are demonstrably less responsible (and therefore more likely to incur a claim)?

  41. NoWin says:

    @Beerad: I’m not necessarily not in disagreement with you, it’s just that statistics (in this case) are over-manipulated by the people in the “best statistical manipulation line of business.” Kinda’ like the fox guarding the coop. (Bad analogy, but lets indulge the populas for discussion)

    Using their “proven statistical formula” one winds up painting some good drivers as bad risks simply because of issues not at all related to driving skill and/or experience.

    And here in Mass, you CANT shop around: the rates are set bu the state insurance commissioner, although that will change next year with “limited” competitive bidding, and a one-year hold on possible use of credit-score factoring.

    Oh, by the way, our jobless rate in Mass is up again here, so I guess when the next 1000 jobs go out-of-state, all our car ins rates should go up too….

  42. ancientsociety says:

    @forever_knight:

    “you can make 10k a year and still have a great credit score”

    …..okay, maybe you could if you lived with your parents/squatted, are under 18, living off Ramen, not buying a single material object in a year, not having to pay for gas or public transit, were in perfect health/had insurance that covered EVERY claim….yeah, then I guess you could live on 10K/yr and have a great credit score.

    Do you know lots of people who are able to do this?

  43. forever_knight says:

    @ancientsociety: i know one person: i lived off of 15k a year. in an expensive part of the country too. sometimes i had to pay interest on my credit card because i didn’t have the money to pay it off that month. but i ALWAYS PAID AT LEAST THE MINIMUM.

    notice i didn’t say you can live extremely comfortably on that amount of money. you can, however, pay or make payments for the shit you decided to buy. it’s all about choices and responsibility!

  44. Beerad says:

    @Eyebrows McGee: Easy there, McGee. Yes, I quoted your line to emphasize my point. And I noticed your issue about the “only” factor in consideration was credit score, but that didn’t seem to be what the articles were about and I doubt there’s an insurance company that would be in business long ONLY using credit score — as many people have pointed out, there’s too many other variables that have an effect. Anyway, nothing personal.

    @ancientsociety: It’s pretty true that a high credit score does not require a sky-high income to develop. Just get a credit card or two, make some normal charges every month (that you’d be paying for anyway, like groceries and utilities) and pay them off in full. Give it a few years and you’re in pretty good shape. Fiscal responsibility ftw.

  45. satoru says:

    Remember that the insurance companies are only interested in CLAIMS. You could drive like a moron, but if you don’t actually make any claims then as far as the insurance company is concerned you’re a ‘good driver’.

    In this situation the, lets assume that a good and bad credit driver get into an accident with some bumper damage. Let’s say $750 to $1000. The person with good credit might think that 1) with the deductable they won’t get much money anyways 2) calling insurance will cause their premiums to increase 3) lets face it dealing with insurance claims really really sucks! 4) maybe if i just go to a bodyshop i can get it fixed for cheaper with no increase in my deductable. Thus no claim is made.

    The person with bad credit since they can’t afford to suck up the losses even with the deductable since they’re so far in debt anyways. Thus a claim is made.

    It’s sort of a generalization but it could be a possible mechanism to explain why credit scores are a good indicator for CLAIMS (despite what you might think this fact is undisputed statistically). Again this has NOTHING to do with good driving, which the insurance companies in the end don’t actually care about. They want to know if you’ll make a claim and for how much and then they will assess risk.

  46. oneswellfoop says:

    To all those people who say credit rating =/= equal driving risk: where’s your data? The insurance companies have their data, the FTC backed it up. Do you have data with per capita accident rate/credit score correlations on individual races?
    Not to be a dick, but you’re all spouting opinions and don’t have any numbers to back it up, nor probably any experience either. I will tell you that when I drive and see a car merging across multiple lanes without using a turn signal and find the driver on the cell phone when I pass they are likely to be(in order of likely-hood and the type of car varies with the person): black, hispanic, old white person(minus the cell phone), some redneck that doesn’t know how to drive, random distracted or stupid white person who is not a redneck.
    This happens to me multiple times a day. The grocery store is four miles from my house, the coffee shop I go to is 2 miles from my house, my work is one mile from my house. All in the same direction. I drive about eight miles a day…
    There have also been a number of times I have thought about not getting out of the way and letting the person hit me so that they can buy me a new car, but that sort of thing contributes to rates going up across the board if enough people do it, so I do my part and don’t.

  47. ancientsociety says:

    @forever_knight: @Beerad:

    I’m not saying one needs to make six figures to have a good credit score.

    I’m simply saying that if someone’s income is at or below the poverty line in this country, then most probably don’t have good credit. It has nothing to do with “personal responsibility” or “managing finances”. People at that income level simply do not have many options if hit by a fiscal emergency.

  48. ScramDiggyBooBoo says:

    Hmm, i’d rather have it based on whether the person blows at driving or not, cause that late credit card payment won’t mean S**t when i get t-boned.

  49. bravo369 says:

    I don’t understand how your race matters in calculating credit score. If you don’t pay your bills, you get a low credit score. Either way, why would insurance even have to check credit score? I pay you, you give me coverage. Even with a perfect credit score, if I don’t pay you, you cancel me. So what would be different?

  50. erratapage says:

    We don’t like the fact that they use credit score to price insurance, but if we own a home, we like that they use home ownership as a factor. If we are over 55, we like that they use age, but if we are under 26, we don’t like that they use age.

    The problem here is not that they use these data, it’s that the people who can least afford not to have insurance are being priced out of it. I think we may need to look at larger social and economic issues to solve the inequities of the cost of insurance.

  51. Anonymous says:

    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?

  52. harshmellow says:

    @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.

  53. harumph says:

    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.

  54. Geekybiker says:

    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.

  55. @Beerad: Well, as long as it was nothing personal. ;)

  56. xxenclavexx says:

    Fine with me, credit score is not bad

  57. ppiddyp says:

    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?

  58. forever_knight says:

    @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.

  59. Itch says:

    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.

  60. Canadian Impostor says:

    @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.

  61. Beerad says:

    @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.

  62. Catperson says:

    @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.

  63. Zombietime says:

    Hell no! I have bad credit but i’m a good driver and have never been in an accident.

  64. axiomatic says:

    The only thing that should be based on my credit score is………… wait for it……. revolving credit!

  65. riggs says:

    @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.

  66. forever_knight says:

    @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.

  67. mcws says:

    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!

  68. chartrule says:

    insurance should be rated on driving history not how much people are willing to lend you

  69. MrEvil says:

    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.

  70. mcws says:

    @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.

  71. balthisar says:

    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).

  72. Her Grace says:

    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.

  73. Boberto says:

    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.

  74. EmmaC says:

    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.