You paid off your mortgage years ago. You have two cars, and even paid for them in cash. You pay all your bills by cash or check. you are a model of fiscal responsibility. When the time comes to renew your auto insurance, your insurance company informs you that they have credit scored you. Even though most people would envy your financial situation, you find yourself facing a premium increase of over 100 percent.
This was the dilemma for Pat and Clyde Henry of Ohio. The Henrys had virtually no credit history on file with three major credit agencies, and to their insurance company, no credit was the same as bad credit, even though I knew their particular financial details.
The seemingly bizarre situation the Henrys found themselves in is not as uncommon as you probably believe. Few Americans realize that their credit history can affect their insurance premiums, or even whether they can get insurance in the first place.
For 34 years Mattie Grainger from South Carolina had an auto insurance policy with Allstate. The senior citizen had a clean driving record, few insurance claims, and was eligible for a variety of safe driver discounts. Yet Allstate raised her premiums and told her she would not qualify for a lower rate because of a low credit score. Grainger's credit score was low only because she did not have much use for extensive credit. "Many elderly persons do not like to borrow money, yet they pay their bills on time," says Peter Porter, a consumer advocate from the South Carolina Department of Consumer Affairs. "A model which looks at a person's credit history might have a negative impact on that segment of the population."
The problem does not just concern senior citizens. The insurance industry justifies the use of credit-scoring by speculating that a person who is reckless with credit is likely to be a reckless driver or an irresponsible homeowner. Yet this ignores the fact that many people find themselves in financial crises that damage their credit through no fault of their own. Anyone facing a financial crisis may find themselves further punished by their insurance company.
Which is exactly what happened to Kathryn Perry. The Wimberly, Texas, nurse drove less than 1,000 miles a year, had no tickets, and only one accident -- 25 years earlier. But she fell behind on her bills after her daughter was murdered. She eventually got back on track, but it left a negative mark on her credit report. Then her insurance company told her it would cost a little more to renew her auto insurance policy. Nearly 600 percent more, in fact. Her yearly premium shot up from $437 to $3,000. "They are victimizing the victims," Perry told lawmakers when she testified at a hearing before the Texas House of Representatives.
Credit reports are also notoriously unreliable. One study found 79 percent of reports contained errors, and 25 percent contained serious errors. Additionally, the secret nature of credit reports' inner workings leaves customers confused. Having too many credit cards results in a negative effect on the credit score, but so does having too few.
The insurance industry is increasingly relying on credit-scoring to slice up the market of potential insureds. The insurance industry claims that the use of credit-scoring saves the consumer money, but in fact, independent analysis suggests the industry may have squeezed an extra $67 billion in profit from the practice between 2003 and 2006.
Credit-scoring disproportionately disfavors minorities and the poor, many of whom lack to the credit history even to generate a credit score. The Consumer Federation of America uncovered documents from GEICO, one of the nation's biggest auto insurers, that showed a factory worker with just a high school diploma would pay 90 percent more for auto insurance that an attorney with a professional degree, even if their qualifications and driving record were identical. Credit scoring is just the most recent example of discrimination from an industry that has long been associated with practices such as redlining (refusing insurance to minority communities) and reverse redlining (charging more to minority communities).
Perhaps the most disturbing aspect of the insurance industry's use of credit scores is that it may only be the tip of the iceberg. Insurers are investigating whether they can predict who will make a claim by studying publicly retrievable lifestyle data. Your hobbies and grocery bills could be used along with your credit score to make insurance decisions.
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