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Using drivers’ credit scores to set car insurance prices has been shown to result in drastically higher rates for people with ‘poor credit’ and for minorities; why credit-scoring is so unreliable

Credit Scoring

The Detroit Alliance for Fair Auto Insurance is on the right track in trying to eliminate credit-scoring as a rate-setting factor for Michigan’s car insurance companies.

Credit scoring raises the price of auto insurance — which in Michigan is already too high. This in turn prices many people out of the auto insurance market and drives them out onto the roads without the legally required No-Fault and liability coverage.

I support the stated mission of the Detroit Alliance for Fair Auto Insurance, which is to both bring the price of car insurance down while simultaneously preserving Michigan’s important No Fault insurance benefits and protections. One way to lower the price for thousands is by putting an end to credit-scoring.

The research is clear about the two overarching, pernicious effects of credit-scoring:

  • Drivers with poor credit scores pay drastically more than drivers with excellent credit scores — even when both drivers have safe driving records.
  • Use of credit scores as a rate-setting factor by car insurance companies results in higher prices for black and Hispanic drivers than the prices being white and Asian drivers.

Plus, when one looks at the specific practices of specific auto insurers, it’s obvious how the use — and abuse — of credit-scoring is imposing an unbearable financial burden on consumers, with drivers with poor credit paying as much as 80% to 100% more.

Finally, aside from the reasons above, credit-scoring should be prohibited because of its unreliability due to the fact that credit reports — which lie at the heart of credit-scoring — are often rife with errors.

Michigan drivers with ‘poor credit’ pay more than 100% more for auto insurance

In its July 30, 2015, Special Report “The Secret Score Behind Your Rates,” Consumer Reports looked at the insurance rates for “the average new-customer premium for adult single drivers with a clean driving record and poor, good, or excellent credit.”

What Consumer Reports found was stunning:

  • The driver with “excellent credit” paid “$2,371.”
  • The driver with “good credit” paid “$403 More” at “$2,774.”
  • The driver with “poor credit” paid “$3,354 More” at “$5,725.”

In a more general sense, Consumer Reports concluded that, in Michigan, “the average extra [auto insurance] cost of drivers with poor [credit] scores, as compared to drivers with excellent credit” was “$2,001 + more.”

How credit-scoring forces blacks and Hispanics to pay more for car insurance

I’ve said before that the exorbitant car insurance prices being charged to Detroiters is most definitely a civil rights issue.

Detroit Mayor Mike Duggan acknowledged the point during his February 2017 State of the City address:

This is a “civil rights issue” because “half of Detroiters don’t have mobility because they can’t afford their car insurance.”

Indeed, the Federal Trade Commission (FTC) has even confirmed the disproportionate impact that credit-scoring can have on certain communities:

In its “study concerning credit-based insurance scores and automobile insurance,” the Federal Trade Commission determined that, “as a group, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians. Therefore, the use of [credit-based insurance] scores likely leads to African-Americans and Hispanics paying relatively more for automobile insurance than non-Hispanic whites and Asians.” (FTC, 2007, “Report on Effects of Credit-Based Insurance Scores”)

How are insurers using credit-scoring to charge more?

In my blog post, “How do credit scores punish Detroit residents when paying for auto insurance?,” I reported about the credit-scoring effects of four of Michigan’s largest car insurance companies:

  • Allstate had “a 116% fluctuation in premiums between a consumer with excellent credit and a consumer with no credit.”
  • Farmers’ premium fluctuation between consumers with “excellent credit” and “no credit” was approximately 80%.
  • Progressive’s premium fluctuation between consumers with “excellent credit” and “no credit” was approximately 48%.
  • State Farm “display[ed] a 45% premium fluctuation” between “a consumer with excellent credit and a consumer with no credit.”

Credit report errors make credit-scoring unreliable

To paraphrase the old adage: You can’t always believe what you read in a credit score.

The reason that’s true is because the credit reports on which the scores are based are notorious for containing tons of errors and inaccuracies.

As I discussed in my blog post, “One More Reason Insurance Companies Shouldn’t Use Credit-Scoring To Set Prices,” the FTC has shown:

  • “[F]ive percent of consumers [i.e., 1 in 20] had errors on one of their three major credit reports that could lead to them paying more for products such as auto loans and insurance.”
  • “Slightly more than one in 10 consumers saw a change in their credit score after the CRAs modified errors on their credit report …”
  • “Approximately one in 20 consumers had a maximum score change of more than 25 points and only one in 250 consumers had a maximum score change of more than 100 points.”

One Comment

  1. Gravatar for Marvin Doupel

    Using credit score as a criteria for how auto insurance is priced is good but discriminating against minorities is wrong and must be declared legal offence.

Comments are closed.

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