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How Credit Scores affect Car Insurance Rates:
You can be denied coverage because of low credit scores
by: www.rebuildcreditscores.com
You can be denied coverage because of low credit scores
by: www.rebuildcreditscores.com
Problems with Insurance Industry and Credit Scoring
Decisions based on insurance scores
An insurance company can approve or deny you auto insurance based on your insurance score,
even if you have a spotless driving record and never had an at-fault car accident. They can also
raise your premiums based on their credit scoring model. The scores have become more important
than your driving record in determining your premiums.
Why are insurance companies viewing credit histories
When an insurance company pulls your credit they are looking for predictor items associated with
credit management patterns. These patterns supposedly correlate insurance risk. The predictors
are outstanding debt, how long you have utilized credit, late payments, public records such as
bankruptcy, collection items and new credit applications. Emphasis is put on credit activities
occurring in the last 12 months.
Their belief is that insurance scores predict the average claim behavior of a group of people with
essentially the same credit history. A consumer with a good score, typically 760 and above, is least
likely to file an insurance claim. While consumers with a bad score, typically 600 and below, tend to
file more claims.
Decisions based on insurance scores
An insurance company can approve or deny you auto insurance based on your insurance score,
even if you have a spotless driving record and never had an at-fault car accident. They can also
raise your premiums based on their credit scoring model. The scores have become more important
than your driving record in determining your premiums.
Why are insurance companies viewing credit histories
When an insurance company pulls your credit they are looking for predictor items associated with
credit management patterns. These patterns supposedly correlate insurance risk. The predictors
are outstanding debt, how long you have utilized credit, late payments, public records such as
bankruptcy, collection items and new credit applications. Emphasis is put on credit activities
occurring in the last 12 months.
Their belief is that insurance scores predict the average claim behavior of a group of people with
essentially the same credit history. A consumer with a good score, typically 760 and above, is least
likely to file an insurance claim. While consumers with a bad score, typically 600 and below, tend to
file more claims.
Car insurance and your credit scores should be two separate issues. Unfortunately it has
become a common practice for big corporations to pull consumers' credit reports for just about
any reason. This practice has invaded the car insurance industry and bad credit can mean
you pay higher insurance rates and may even result in a denial of coverage.
become a common practice for big corporations to pull consumers' credit reports for just about
any reason. This practice has invaded the car insurance industry and bad credit can mean
you pay higher insurance rates and may even result in a denial of coverage.
More Resources
Get a Car Loan Today
Auto Loan Bailout helps consumers with
bad credit and good credit obtain loans.
Bad Credit Auto Loans
Learn how to get a bad auto loan during the
credit crunch.
Refinance your Auto Loan
Get a lower interest rate and save money
by refinancing your auto loan.
Get Car Insurance Instant Quotes
Quote Wizard provides free auto insurance
quotes from multiple companies so you
can get best deal!
Auto Loan Bailout helps consumers with
bad credit and good credit obtain loans.
Bad Credit Auto Loans
Learn how to get a bad auto loan during the
credit crunch.
Refinance your Auto Loan
Get a lower interest rate and save money
by refinancing your auto loan.
Get Car Insurance Instant Quotes
Quote Wizard provides free auto insurance
quotes from multiple companies so you
can get best deal!
In the past insurance companies considered
driving record, age, type of automobile and the
number of insurance claims to determine who to
insure. The last decade has brought about a
change in the insurance industry.
Many of them rely heavily upon credit scores as a
predictor of risk. Insurance companies believe the
better someone’s credit rating the least likely an
insurance claim will be made and the more
likelihood insurance premiums will be paid.
driving record, age, type of automobile and the
number of insurance claims to determine who to
insure. The last decade has brought about a
change in the insurance industry.
Many of them rely heavily upon credit scores as a
predictor of risk. Insurance companies believe the
better someone’s credit rating the least likely an
insurance claim will be made and the more
likelihood insurance premiums will be paid.
A standard scoring model does not exist
Some insurance companies use a scoring model created by ChoicePoint and Fair Isaac
Corporation, the company that invented credit scoring. Other insurance companies have designed
their own scoring models. A standard scoring model does not exist. Each insurance company uses
different models and weighs different data in a consumer’s credit report.
Credit reports contain errors
According to a study by PIRG (Public Interest Research Group), as many as 79% of credit reports
contain errors and 29% of those errors are serious enough to result in a denial of credit. The
credit data from which the scores are derived have a reputation for being inaccurate, erroneous
and out of date. While the information used in insurance scoring models does not include personal
data such as a race, religion, gender, marital status, age, nationality, handicap, address or income;
several studies have shown that insurance scoring adversely affects African Americans, Hispanics,
and low-income consumers.
Steven Parton, general counsel for the Florida Office of Insurance Regulation, says, “What they’re
really looking to see with insurance scores is who is most likely to file a claim, not who will most likely
have an accident. If I have the money, I won’t file a claim, because my rates will go up. People of low
economic status don’t have that luxury.” Parton adds, “Insurance companies are looking at whether
they’re relying on their insurance in case they have an accident, which is what they’re buying
insurance for to begin with.” (ConsumerReports.org)
A consumer must be informed if credit data is used
Insurance companies must disclose to consumers they are using credit information in the
underwriting process and to determine rates. If a consumer’s credit score is the determinant in
rejecting an application for insurance or another adverse decision, the consumer must be notified.
In accordance with the Fair and Accurate Credit Transactions Act of 2003 (FACT), a copy of the
consumer’s credit report must be made available to the consumer free of charge.
Studies by ConsumerReports.org (August 2006)
Studies done by ConsumerReports.org found “erratic results” when credit scoring models were
used by insurance companies.
But some state regulators still have doubts. “You can’t say this is the best predictor we have, but at
the same time we all do it completely differently,” says Joel Ario, the insurance administrator of
Oregon. “Either there’s a core to this or it’s a farce.””
Some insurance companies use a scoring model created by ChoicePoint and Fair Isaac
Corporation, the company that invented credit scoring. Other insurance companies have designed
their own scoring models. A standard scoring model does not exist. Each insurance company uses
different models and weighs different data in a consumer’s credit report.
Credit reports contain errors
According to a study by PIRG (Public Interest Research Group), as many as 79% of credit reports
contain errors and 29% of those errors are serious enough to result in a denial of credit. The
credit data from which the scores are derived have a reputation for being inaccurate, erroneous
and out of date. While the information used in insurance scoring models does not include personal
data such as a race, religion, gender, marital status, age, nationality, handicap, address or income;
several studies have shown that insurance scoring adversely affects African Americans, Hispanics,
and low-income consumers.
Steven Parton, general counsel for the Florida Office of Insurance Regulation, says, “What they’re
really looking to see with insurance scores is who is most likely to file a claim, not who will most likely
have an accident. If I have the money, I won’t file a claim, because my rates will go up. People of low
economic status don’t have that luxury.” Parton adds, “Insurance companies are looking at whether
they’re relying on their insurance in case they have an accident, which is what they’re buying
insurance for to begin with.” (ConsumerReports.org)
A consumer must be informed if credit data is used
Insurance companies must disclose to consumers they are using credit information in the
underwriting process and to determine rates. If a consumer’s credit score is the determinant in
rejecting an application for insurance or another adverse decision, the consumer must be notified.
In accordance with the Fair and Accurate Credit Transactions Act of 2003 (FACT), a copy of the
consumer’s credit report must be made available to the consumer free of charge.
Studies by ConsumerReports.org (August 2006)
Studies done by ConsumerReports.org found “erratic results” when credit scoring models were
used by insurance companies.
- ““For example, if insurance scores were neutral, our hypothetical customer would pay roughly
the same annual premium at Nationwide and GEICO, about $1,150. But if the driver received
the worst possible insurance scores, the premium would increase 29 percent to $1,468 at
GEICO and 47 percent to $1,706 at Nationwide. At Birmingham Fire, scoring from best to
worst increased the premium by $3,166.
Such variations raise questions about whether scoring closely customizes price to each driver’
s loss risk, as insurers contend. How precise can scoring be when our hypothetical customer
with the best score gets a 31 percent discount on his annual premium at Progressive but only
a 19 percent discount at Birmingham Fire? Or when USAA charges our hypothetical
customer with the worst score 32 percent extra, why is State Farm charging him 108 percent
more?
Leslie Kolleda, a spokeswoman for Progressive, says that the variation in pricing has
“nothing whatsoever to do with credit scores” and is typical of insurer-to-insurer price
differences. Progressive’s comparison of 90,000 multicompany premium quotes in 2002
showed a $524 difference, on average, on six-month policies.”
But some state regulators still have doubts. “You can’t say this is the best predictor we have, but at
the same time we all do it completely differently,” says Joel Ario, the insurance administrator of
Oregon. “Either there’s a core to this or it’s a farce.””
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