Consumer Reports magazine September edition has a special report on how insurance companies use (really misuse) credit scores in determining how much to charge you for your car insurance. Each insurer cherry-picks about 30 of almost 130 elements in a credit report to come up with its own proprietary score. That score will be quite different than your FICO score. Customers with low credit scores are made to pay a lot more than customers with better scores. For example, a single driver in Kansas who incurred one moving violation would get an increase in his premium of $122/year, but if his credit score was only “good,” the increase would be $233 and a poor credit score would add $1,301 to the premium on average! In another example, a single adult Florida driver with excellent credit may pay $1,409 on average for insurance as compared to $1,721 if the driver had good credit, and a whopping $3,826 for a driver with bad credit.
Insurance companies don’t tell customers how they have been scored. Consumer Reports found that this all started in the mid 1990s when some insurers began working with Fair Isaac Corporation, the company that created the FICO score, on the theory that scores might predict claim losses. (Query whether there is a correlation between low credit scores and claims made). By 2006, almost every insurer was using credit scores to set premiums. Fortunately for drivers in California, Hawaii and Massachusetts, these states prohibit insurers from using credit scores to set pricing. What’s unfair about this practice is that customers with low or even good credit scores pay for accidents they have not caused and may never happen. Plus, good drivers who have good driving records get penalized big time! Every state should ban insurance companies from using credit scores. The use of credit scores by car insurance companies surely is just an excuse to overcharge consumers. And why no transparency? Why don’t insurance companies let consumers know their credit scores?