Credit Scoring and your Insurance Rates

Credit Scoring and your Insurance Rates.

What does credit scoring have to do with your insurance rates? Although insurance companies are prohibited from discriminating against their customers because of the color of their skin etc.  Many insurers are making decisions about how much to charge for insurance based on your credit scores. Resulting in minorities and poorer customers paying more for the same level of coverage as you simply due to their lower credit scores.

Your credit score costs you money

In Texas and in many other states, an insurer looks at your credit score to determine the amount it will charge you for insurance. This practice is called “credit scoring” it is vigorously defended by the insurance industry. Which claims that there is a relationship between whether or not you have good credit and whether or not you will make claims on your insurance policy. In a nutshell, the insurance companies argue that your lower credit = higher costs for them.

Paying up to 400% more for the same coverage

However, opponents of credit scoring note that the practice is unlike most of the other factors that insurance companies consider in setting rates. Such as your driving record or the number of claims you have made in the past. Basing premiums on credit scores can result in you, who has never made any claims paying high insurance rates just because you have bad credit. The differences are not trivial. Credit scoring can result in one insured paying up to 400% more for the same coverage as another insured, just because of a low credit score.

Studies in credit scoring

A study of 2 million auto insurance policies in Texas showed:

  • 90% of the drivers who had high credit scores were white, even though only 51% of the policies were issued to white drivers.
  • Conversely, African-American drivers made up 33% of the group with the lowest credit scores. Despite the fact, they only represented only 7% of the drivers in the study.

Opponents of credit scoring

Opponents of credit scoring also express concerns. Given that even as incomes rise, the credit scores of minorities tend to still remain lower. While in contrast, credit scores of equivalent white households tend to rise.

Some states have rightly moved toward banning the practice of credit scoring. Mostly because insurance companies should not be allowed to do indirectly what they are forbidden to do directly…Discriminate.

Even so, other states have resisted such a ban. Nonetheless, the question of whether insurers should be allowed to set their rates by credit scoring is not going away.

Do yourself a favor, check your auto insurance credit score here.

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