June 18, 2002
An unfavorable credit report can cost you big bucks in more ways than you might think. Auto and homeowners insurance companies are looking closely at their customers' credit ratings, claiming that their research indicates consumers with poor credit are more likely to file insurance claims.
The credit score has "predictive value," as one insurance executive put it recently. The insurers don't bother to speculate how or why credit would affect a driver's accident record or a homeowner's propensity to file damage claims. The name of the game for insurers is identifying risk factors, not explaining them.
"I can't understand how they can do this. It seems so wrong and there needs to be a law against them doing this to anyone," said Theresa of Killeen, Ala. in a recent complaint to ConsumerAffairs.com. Her family is unable to pay the steep new rates Alfa Insurance Co. is charging them for homeowners insurance. The company raised their rates after Theresa suffered a back injury and could no longer work, leading the couple to file for bankruptcy.
"This is an outrage and I feel that this issue needs to come to the Legislature's attention!" Theresa said. In fact, the issue did come before legislatures in about 30 states over the last few years but most either took no action or enacted measures that allow the practice to continue, as long as credit ratings are not the only factor considered.
The insurance companies argue that their actions are pro-consumer. By being better able to identify customers who are likely to file big claims, the companies are able to hold down their rates to other, better customers, they claim.
Many consumer activists bitterly oppose the practice and note that it can penalize consumers who may not be aware that their credit reports contain errors.
A few states have taken action to force insurance companies to eliminate or reduce their reliance on credit ratings, according to a recent Washington Post survey.
Maryland has enacted a complete ban on the use of credit scores in homeowners insurance and sharply restricted its use for car insurance. Texas is investigating and Florida has convened a task force to study the issue.