Auto Insurance Rates & Credit Scoring, an Ethical Debate

February 23, 2017

The Use of Credit Scoring in the Auto Insurance Industry
For the past dozen years the auto insurance industry has employed a strategy using credit scores of consumers to gauge the rate they pay for auto insurance. Insurers hypothesize that one’s credit score is a reasonably accurate predictor of the likelihood a customer will file an insurance claim. The assumption is that if you have a low credit rating, you are more likely to file an insurance claim and therefore should have to pay a higher premium for auto insurance. It appeals to reason that if a group of consumers is receiving a larger proportion of the compensation, that group should shoulder a greater portion of the expense.

What is a Credit Score?
Your credit score is usually depicted as a number ranging between 350 and 850 which is a numerical representation of your performance paying your bills. Lenders use the score to measure risk when making loans. The higher your score, the more likely you can be trusted to pay back a loan. The most trusted credit scoring method is called the FICO score, created as a tool in the mortgage industry by Fair Isaac & Co. You can check your credit score by enrolling with one or more of the three credit bureaus that use similar scoring methods, Equifax, Experian, and TransUnion.

How Credit Scores Affect Your Auto Insurance
In using the credit scores of its customers, insurers rationalize that drivers who receive the greater share of benefits (file the most claims) should bear the greater burden of expense. Good drivers should not have to subsidize bad ones. University studies show that those with low credit scores tend to file auto insurance claims more often that those with higher credit scores.

Redlining and Credit Scoring
There is a connection between socio-economic status and credit score which unfortunately allows some to draw the conclusion that charging more for auto insurance based on credit score is racially biased. A while back the common practice of ‘redlining” was employed where residents of certain postal zones were charged higher rates for being in a higher socio-economic risk category for filing auto insurance claims. This practice has since been halted and insurers firmly state that their practices do not discriminate on the grounds of race, ethnicity or disability.

How the Consumer Can Take Charge
The reality is that many, if not all insurers use credit scoring as part of their method of assigning auto insurance rates. Whether this practice is discriminatory on the basis of race or ethnicity is a continuing debate. To adapt to this practice, we have one variable that we can change: we can do something about our credit scores. First, find out what your credit score is and how it is calculated. Find out how your debt-paying habits affect your credit. Paying your bills late can hurt you. Use credit cards responsibly. Resources on the Internet can give you dozens more tips to improve your credit score, helping to lower your auto insurance, and stabilize your finances as well.