Your credit score may matter more than your driving record

CRO_TOC_Cover_09_2015The vast majority of auto insurers use credit information to help determine your premiums, except in the three states where it’s not allowed (California, Massachusetts and Hawaii). Credit scores don’t just matter–a new special investigation by Consumer Reports has found that sometimes your credit scores matter more than your driving record.

The researchers hired a company called Quadrant Information Services, which gathers the mathematical pricing formulas insurers have to file with the states. They used the data to create 20 hypothetical policyholders and analyzed what happened when various ratings factors were changed. In Kansas, for example, a moving violation would boost a single policyholder’s premium by $122 on average, but a good (rather than a great) credit score would increase it by $233. A bad score could drive it up by $1,3o1.

The credit scores insurers use aren’t the same as the ones lenders use, and you have no right to see the insurance scores that are being used to judge you.

The researchers get a bit off track when they imply that using credit scores discriminates against the poor, because that isn’t something that’s backed up by research. But you should have a right to see any score that’s being used to judge you, and to challenge the accuracy of the underlying information that goes into the score.



Insurance scores aren’t the same as credit scores

Dear Liz: I have very high credit scores, but recently got a notice from my homeowners insurance company saying that my rates were rising because there had been a number of inquiries on my credit report. The inquiries were as a result of my looking for the best deal on a mortgage refinance, and we applied for a retail card to save the 5% on our purchases. Do many insurers use FICO scores as a rate determiner?

Answer: Insurance companies don’t use FICO scores to set rates, but they do use somewhat similar formulas that incorporate credit report information in a process called “insurance scoring” to set premiums. Insurers, and some independent researchers, have found a strong correlation between negative credit and a person’s likelihood of filing claims. (California and Massachusetts are among the few states that prohibit the practice.)

The formulas insurers use sometimes punish behavior that has only a minor effect on your FICO scores. Since insurers use different insurance scoring formulas, however, you may well find a better deal by shopping around.