Credit scores tied to insurance rates

An FTC report finds that use of credit scores unfairly targets some ethnic groups.

MCCLATCHY NEWSPAPERS

WASHINGTON — Putting the pedal to the metal has always put people at risk of higher car insurance premiums, but what about making late credit card payments?

Over the last decade, insurers increasingly have relied on customers’ credit scores as a factor in determining how much to charge them for automobile insurance.

It’s a practice that has some lawmakers crying foul because of evidence that it disproportionately affects some minority groups.

A Federal Trade Commission report, requested by Congress, found that credit scores effectively predict the frequency of claims made to auto insurance companies. Using credit scores is likely to mean that 64 percent of blacks, 53 percent of Hispanics, 38 percent of non-Hispanic whites and 34 percent of Asians would pay higher premiums, the FTC said.

“This is totally unfair even if there is some statistical relationship,” Rep. Mel Watt, D-N.C., said after a hearing Tuesday on the use of credit-based insurance scores.

“That might be equivalent to having your driving history determine whether you get a bank loan or the interest rate you will pay on the loan,” said Watt, the chairman of the oversight and investigations subcommittee of the House Financial Services Committee.

Defend the practice

Insurance companies were quick to defend the practice as sound actuarial policy and an excellent indicator of risk.

Insurers typically give more weight to factors such as an individual’s driving record, the type of vehicle they own and the area where the car owner lives, said Robert Hartwig, the president of the Insurance Information Institute, a trade group for insurers.

A report issued by his group suggests that people who are careful money managers also tend to be attentive to how they drive, service their vehicles and maintain their homes.

Nevertheless, at least four states — California, Hawaii, New Jersey and Massachusetts — have banned the practice of credit-based insurance scores.

Washington state Insurance Commissioner Mike Kreidler said that anyone with a teenage driver in the household knows about risks being considered in their insurance premiums.

“But it is our responsibility as regulators to ensure that credit scoring does not unfairly discriminate and harm protected classes of people,” he said in explaining the tight restrictions his state uses.