It looks like people who make late credit payments are at risk of having higher auto insurance premiums.

Over the last couple of years, insurance companies in the U.S. have increasingly considered their clients? credit scores to calculate how much to charge them for car insurance services. This policy inevitably affects many low income and minority groups of population.

According to a requested by Congress Federal Trade Commission report, drivers with lower credit scores tend to make more claims to their insurers. The report says that when car insurance companies increase premiums for people with low credit scores, they make ethnic minorities pay disproportionally higher rates. As the result, African-Americans (64%), Hispanics (53%), non-Hispanic whites (38%), and Asians (34%) become negatively affected.

Many people think that the use of credit-based insurance premiums is a totally unfair and even discriminatory practice. Chairman of the House Financial Services Committee Mr. Watt points out that such policy can be comparable to calculating your bank loan interest rate on the basis of your driving history.

However, major insurers justify this practice by saying that the credit score of their customers is the best indicator of risk. They insist that people who manage their finances well are also careful drivers and maintain their vehicles well. Despite such claims, four U.S. states, Hawaii, New Jersey, California, and Massachusetts, have adopted laws that prohibit auto insurance companies from calculating their customers’ premiums on the basis of their credit score.

President of the Insurance Information Institute Robert Hartwig says that, while determining premiums, insurance companies still give more weight to other important factors, such as the type of a car, the area of residence, and the driving record of their clients. He also points out that banning the practice of credit scoring would actually harm millions of people who have excellent credit histories and therefore pay less for their auto insurance.

Roger Pecover

3 Responses to “Auto Insurance Rates Depend on Clients’ Credit Score”

1. Randy Newnam Says:
December 3rd, 2007 at 4:04 am

My credit score isn’t the best in the world after my bankruptcy but I know without any doubt in my mind that I have a perfect driving record. No tickets and no wrecks. So, my question is this. In MY case where my credit sucks but my driving record is perfect, how is this credit-based scoring fair to me?

2. Taz Says:
December 4th, 2007 at 10:34 am

@Randy: It’s not fair in any way. I can’t believe that they are trying to justify it, saying that someone that is careful with their finances will automatically be careful on the road. I guess none of those people have been driven off the road by some rich twat in a Lexus who’s too busy yakking on her cell phone with her investor and drinking her Starbuck’s to pay attention to what’s going on on the road. She’s probably got a perfect credit score, and pays less for full coverage than I do for liability only on my 18 year old beater.

3. Paul Says:
December 28th, 2007 at 1:57 pm

It’s fair in the same way that the world’s most careful 16 year-old, who drives like a little old lady on Sunday afternoon, still gets lumped in with all the badass teenagers for making rates.

Insurance is about rating categories, not individuals. If you’re 16, you pay one rate. If you’re 40, you pay a different rate. If you live in the city, you pay differently than if you live in the country. The same goes with credit score.