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Credit Scores Linked to Insurance Cost

cs-9When I was 17 years old I drove like a bat out of Hell with a burger in one hand and one eye on the ladies along the way because I was desperate for others to think I was cool. My insurance rates were higher than the mortgage on a good sized home. These days credit scores are linked to insurance cost, including auto coverage.

If my credit score was to fall under the national mean I would have been unable to get preferred rates at many major car insurance companies. This score, arrived at by a secret process, could be negatively impacted if I didn’t have a credit line open for at least 40 years.

Makes perfect sense, right?

Well it does to the actuarial artists in the insurance world. The insurance industry points to a study released by the Federal Trade Commission in July of 2007 that looked at the link between credit scores and  insurance.

“Credit scores effectively predict the number of claims consumers file and the total cost of those claims,” concludes the study. “Their use is likely to make the price of insurance better match the risk of loss that consumers pose. Thus, on average, as a result of the use of scores, higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums.”

Linking credit scores to insurance cost is not, however, an issue without controversy. Washington State insurance commissioner Mike Kreidler is furious about the practice and wants insurers to be prohibited from using the score as a ratings basis. Kreidler is, in part, angry about the methods that insurance companies are using to determine the credit score in the first place.

80% of Drivers Overpay for Insurance. Do You? Insurance companies don’t use a score provided by one of the big credit bureaus. They create their own “insurance score” using their own criteria. It’s a secret formula; they won’t tell you how your score is computed. In many states, insurance companies aren’t even required to tell customers their credit history was used to set their premium.

“The secrecy behind this credit scoring is part of what makes it so inherently unfair,” Kreidler says. “No two companies use it the same way and when consumers ask, they can’t get a straight answer on how to get a better score.”

Insurers fight back using credit scores linked to insurance costs. They say that a person who is in financial jeopardy is likely to start skipping payments. Insurers feel that they have the right to protect themselves against loss of premium due to non-payment. The stress of financial difficulties wear on a person, causing distractions, inattention, and are more dangerous on the highway.

Ashley M. Hunter, an insurance specialist who owns HM Risk Group in Austin, Texas says, “Financially stable people have been shown to have fewer traffic violations or accidents than those who are financially stressed. So you’re charged high premiums in anticipation of the violations, accidents, or claims you’ll have in the future.”

Caught in the middle is the responsible driver who has never had a claim or accident.  That driver pays his premiums on time and is a golden client. Recently he accessed a line of credit to pay for some medical bills that his wife had incurred during a recent bout with breast cancer. The tumor was benign and the responsible driver feels blessed.

Then his auto insurance renewal notice arrives in the mail…