A credit score is basically a statistical analysis representing a person’s credit files. Banks and credit card companies use this as a tool to determine the following: those who are qualified to take a loan; the interest rates that may be charged; and, the credit limit which may be given to an applicant. Few people know that credit scores are also being used by auto insurance companies. But these three numbers, which could also be prone to mistakes, may eventually lead to paying higher premium rates because of instances when insurers mistakenly interpret credit reports.
According to Mississippi Insurance Commissioner Mike Chaney, he had also fallen victim to this kind of mistake. Because of the error of his automobile insurance company, he had to face a 10% increase in his premium. It was only remedied when he questioned the hike which was based on his credit history. He said that he was erroneously rated as a credit risk.
It must be understood that a low credit score usually equates to low credibility creditworthiness. And though vehicle insurers maintain that those with bad credit have a bigger chance of filing claims, consumer advocates do not agree. They argue that such is not an accurate yardstick and that there really is no reciprocal relation between risk and credit. Some even argue that credit scoring is stoic; unable to see sudden loss of jobs or unexpected medical bills. As such, they maintain that the auto insurance industry must rely more on proven risk indicators such as the condition of the property being insured or the claims history of a person.
Chaney stated that there were cases when insurers hiked their premiums even without state approval by using credit scoring. In the midst of an economic recession, the debate regarding this issue is raging as more consumers are analyzing their spending.
But insurance providers are defending the use of information regarding credit reports. The practice, which actually started as a mortgage underwriting tool in the mid-90s, had been supported by several studies. In a Federal Trade Commission research, it found that credit-based insurers do have the capacity to forecast potential risks. Other studies based in Texas also hold the same results.
Insurers also say that credit scoring is actually a reward system. Those who have high scores obtain lower premiums. They say that it is a just way to determine premiums. Robert Hartwig, head of the Insurance Information Institute, stated that it is an “objective measure of financial responsibility.” He continued that those who are responsible financially tend to be also responsible on other facets of life. Even employers check the credit history of applicants to see if they are responsible.
It is therefore advised that consumers ask their insurer for reason/s why hikes in their premiums have occurred.