Critics Express Anger over Credit-based Insurance


Consumer rights group reiterated calls for car insurance companies to stop basing insurance rates on credit scores and ratings. Several experts pointed out that while some states do allow insurers to determine premiums based on how well policyholders fare with their credit histories, the controversial practice has to end. Rising unemployment figures and the economic crunch are leading to lower credit scores across the U.S., making credit-based insurance rates unfair for motorists facing tougher financial problems.

Critics Express Anger over Credit-based InsuranceEven government regulators are calling for an end to the dubious practice by the auto insurance industry. The practice has been in place since the early 1990s when insurance providers though it best to base premiums on the credit performance of their policyholders. Since then, there have been numerous conflicting surveys regarding the relevance of credit scores to insurance risks.

Insurers argue that based on statistics, motorists with higher credit ratings tend to be safer and more cautious drivers. However, economists are warning that millions of Americans can see their credit scored drop significantly in the next few months with no immediate end seen yet for the worst recession since the Great Depression. Lower credit scores will eventually mean higher insurance premiums for car owners residing in states where credit-based insurance practices are allowed.

On average, Americans living in some of the largest states can expect to see their ratings drop by some 10 points. Already, banks and lenders are requiring higher credit scores before issuing loans. Analysts say that insurance providers may soon follow suit and make the controversial practice widespread. If this is the case, experts contend, millions of car owners can see their premiums rise dramatically in the coming months.

Consumer advocacy groups are criticizing the insurance industry’s assumption and theory that policyholders with lower credit ratings are more accident-prone. They argue that the theory is simply full of holes and the findings, inconclusive. Insurers, on the other hand, continue to insist that if the practice is banned, insurance rates can go up by as much as 70 percent.

Government officials and well-spoken consumer rights advocates say that the practice is unfair, especially to Americans who may be suffering from severe financial problems. They point out that state governments must review their policies and put an end to credit-based insurance rates. Critics even argue that while driving records may play a crucial part in determining premiums, they do not have as much impact on rates as credit scores and ratings.