Congressman seek stop to use of credit history in setting car insurance rates

Joanne Zornow

Looking for low car insurance rates? Drive carefully and maintain good credit.

But some consumer advocates complain that the sharing of your information between auto insurers and credit agencies affects what you pay for auto insurance in 47 states. The difference can be dramatic, with bad credit histories for young drivers hiking auto premiums by as much as 80 percent.

In July 2012, three congressmen introduced legislation that would prevent insurers from using your credit history to set car insurance rates.

"Auto insurance rates should be based on your skills and responsibility behind the wheel, not extraneous factors outside your control," says U.S. Rep. John Conyers, a Michigan Democrat.

Conyers joined U.S. Rep. Hansen Clarke, another Michigan Democrat, and U.S. Rep. Bennie Thompson, a Mississippi Democrat, in introducing the legislation, known as the Ban the Use of Credit Scores in Auto Insurance Act. If the bill passes, using your credit history to determine car insurance rates would become illegal in all states. The practice already is banned in California, Hawaii and Massachusetts.

Consumer group reaction

Consumer advocates say it’s unfair to assume that people are bad drivers just because they've got poor credit. "The insurance industry claims a variety of benefits from their use of credit scoring,” says Birny Birnbaum, executive director of the nonprofit Center for Economic Justice.

Birnbaum acknowledges that car insurance companies must be able to predict which customers are likely to submit claims, but he says using your credit history as one of the criteria can lead to discrimination.

According to a 2007 report from the Federal Trade Commission, all major car insurers use credit-based insurance scores in some capacity. Car insurers use this data to assign "risk" to consumers and determine how much they should pay for coverage.

Car insurance companiessay credit scoring helps them better predict a customer's level of risk, including the likelihood of filing claims. But critics charge there’s no correlation between how a driver handles money and how he handles a car.

Insurers fight back

The insurance industry defends the practice, which has been around since the mid-1990s.

It's common knowledge that insurance companies have been using credit data for years as part of the underwriting and rating process, says Neil Alldredge, senior director of state advocacy at the National Association of Mutual Insurance Companies, a trade group.

The association says most states have laws requiring insurers to tell customers when credit is used as a rating factor. Furthermore, insurers usually are prohibited from using bad credit as the only reason for canceling insurance or setting rates.

A Consumer Reports analysis found that how well you pay your bills can have a big influence on your car insurance premiums. The analysis disputed by the National Association of Mutual Insurance Companies – found that a 28-year-old driver with a single accident on his record and bad credit would be charged as much as 80 percent more for car insurance than a driver with a single accident on his record and good credit.

'Help' when you're stressed

Birnbaum says that setting car insurance rates based on an applicant's finances is just plain unfair -- and often makes a bad situation much worse.

"You've just been laid off from your job. Or your daughter has a major medical problem that your health insurance (if you have any) doesn’t fully cover. Or you’ve just gotten a divorce. These three life events account for 87 percent of family bankruptcies," Birnbaum says. "To 'help' you out in this stressful time, your insurance company will raise your homeowner’s and auto insurance rates because of insurance credit scoring."

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