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Study Linking Poor Credit to Car Insurance Claims Has Flaws

Car insurance companies have never been overly popular. Drivers often feel that the way in which these companies determine monthly car insurance premiums is flawed and nonsensical. Recent news stories provided these motorists with more ammunition. An Oct. 17 story in the Dallas Morning News found information stating that a study indicating that drivers with poor credit histories are more likely to get into accidents is flawed. This is big news. Car insurance companies have long pointed to the results of this study when explaining why they typically charge a higher car insurance rate to drivers with bad credit scores.

Insurers have used the results of a University of Texas study to justify their habit of charging higher car insurance premiums to consumers with weak credit scores. The study, conducted in 2003, said that drives with low credit scores were more likely to require larger insurance claim payouts during their driving careers. A follow-up study conducted in 2005 backed up these claims. That study by Texas’ Department of Insurance reported that drivers with low credit scores generally report more claims than do motorists with stronger credit. Not everyone, though, agrees with these findings. Some critics say that the insurance study has serious flaws, and that car insurance companies should stop using it as justification for setting higher car insurance premiums for drivers with low credit scores.

One of the more prominent critics of the Texas University study is Birny Birmbaum, former state associate insurance commissioner of the state of Texas. In the Dallas Morning News story, Birnbaum says that the findings of the university study are not reliable or credible. Birnbaum was most disappointed that the study did not look at whether there was any link between bad credit scores and homeowners insurance rates. If the university report did find a link between property insurance and credit rates, that finding would have lent more credence to a relationship between low credit scores and more frequent auto insurance claims. But because the authors of the study focused solely on car insurance, there isn’t enough evidence to determine conclusively that motorist with bad credit histories cost more to insure.

This debate in Texas simply adds to the longstanding doubts many consumers have over the methods insurers use to calculate car insurance premiums. Many consumer advocates dispute the fairness, for instance, of charging drivers a higher car insurance rate simply because they happen to be under the age of 25. Others complain that it’s not fair to charge higher rates to drivers just because they happen to live in a certain zip code. Insurers, though, argue that their research justifies such moves. It’s a debate that doesn’t look to be ending anytime soon.

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