The Baltimore Sun Consuming Interests Column: Your Credit Score Can Affect Car Insurance Bill

By Dan Thanh Dang, The Baltimore Sun

Aug. 7--John Rogers will be the first to admit that he's had some money problems.

Someone digging through the 43-year-old salesman's credit history would see some unpaid bills on his account, a bankruptcy from 15 years ago when his son needed life-saving surgery, and even an Internal Revenue Service lien that still lingers.

"I've been working to improve it," said Rogers, who lives in Northeast Baltimore. "I'm able to go out and get loans and I'm no longer paying the 22 or 24 percent interest that I used to pay. I'm not the worst-credit person in the world and I'm not the best. But I don't see how it has any bearing on how I drive, though."

Well, it doesn't -- not technically, anyway. It does, however, play a role in how much you pay for your auto insurance. Insurance companies don't use your credit score to predict payment behavior. Some use the scores as a factor when estimating the number of, or total cost of, claims that customers are likely to make.

Rogers found that out the hard way. When he recently opened his Erie Insurance renewal statement, Rogers was gobsmacked to find that his auto insurance premium had jumped by 12 percent.

Instead of the $7,400 he was paying for three cars (a 1999 Nissan Sentra, a 2000 Chevy Cavalier and a 2005 Chevy Trailblazer) and four drivers (himself, his 42-year-old wife, 20-year-old daughter and 18-year-old son), Rogers would now have to pay $900 more.

"No one has had any accidents in the last five years," Rogers said. "The only claim we filed was from two years ago when someone kicked the side of my son's car door in while he was downtown. That was filed under an uninsured motorists claim. But that's it."

Confused, Rogers called his local Erie office and spoke to three different people, he said.

The first person was vague about why his rate went up, he said.

The second person mentioned that factors such as a policyholder's credit score can play a role in rates, he said.

The third person danced around the subject when Rogers pushed further, he said.

When I called Erie, spokesman Mark Dombrowski would not discuss Rogers' case with us, citing privacy rules.

Rogers doesn't know for sure if credit scoring is the reason why Erie raised his rates, but he said the mention of it by an Erie rep was troubling since his credit history is far from stellar. There's a good chance that uninsured-motorist claim played a role, too.

What we do know is that under Maryland law, "insurers may not use your credit history to decide if they will insure you, cancel you, renew you or increase your premium," according to a consumer guide from the Maryland Insurance Administration. However, the same law does allow insurers to determine what rate you will be paying.

Dombrowski explained that credit scoring (sometimes called insurance scoring) can be used for rating policies, but not for underwriting policies.

Come again?

"When you underwrite a policy, you have to decide whether you can actually insure a driver," Dombrowski said. "We can't use insurance scoring to make that decision."

In other words, insurers can't deny you insurance based on your credit score. But they can decide that your poor credit score qualifies you for insurance at a higher rate. Other factors such as the type of car you drive, your age, your driving record, and how far you drive back and forth to work are also taken into account.

Keep in mind that not all insurers use credit scoring to determine a portion of your premium. So shop around before you buy.

But, for those who do, they are required to review your credit history every two years or you can request that the insurer do so once during your policy term, according to the insurance administration. Upon review, according to the agency's guide, the "insurer may only give you the benefit of any improvement in your credit history; it cannot be used to increase your premium even if your credit deteriorates from what it was when you applied for your policy."

In Rogers' case, his less-than-stellar credit score can't be used to raise his rates. If he suspects that his credit score is the culprit, he should demand an explanation from Erie about why his insurance rate went up.

Erie must tell him how much of his premium is based on his credit score. And should he discover that the $900 increase was based mostly on his credit score, he might have a legitimate complaint that he should file with the Maryland Insurance Administration.

Once the complaint is filed by letter to Consumer Complaint Investigation at 525 St. Paul Place, Baltimore, 21202-2272; online at www.mdinsurance.state.md.us; or by phone at (410) 468-2340, the MIA can launch an investigation.

At the very least, Rogers should consider shopping around for a company that doesn't use credit scoring in determining rates.

So why even bother with credit history at all? What does it have to do with your risk as a driver? The answer depends on who you ask.

Despite various studies, the issue is still controversial with no conclusive data.

On the insurers' side, the nonprofit trade group Insurance Information Institute said credit scoring is a factor in declining auto insurance rates for millions.

On the other side, consumers and civil rights groups say that no comprehensive, independent study has been conducted on the issue and the practice of credit scoring for auto insurance rates should be banned because of bias.

Just last month, the Federal Trade Commission issued a report that said, "Credit-based insurance scores are effective predictors of risk under automobile policies. They are predictive of the number of claims consumers file and the total cost of those claims."

"The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer," the FTC report said. "Thus, on average, higher-risk consumers will pay higher premiums and lower-risk consumers will pay lower premiums."

Such a glowing endorsement will likely mean that more and more insurers will incorporate credit history into factors used to determine how much consumers will pay for premiums.

But representatives from the Center for Economic Justice, Consumer Federation of America, National Consumer Law Center and the National Fair Housing Alliance argue that proper studies haven't proven a "meaningful connection" between a consumer's credit score and auto insurance losses.

The four groups also condemned the use of insurance scoring for discriminating against low-income and minority consumers. And in fact, the FTC report does acknowledge that minority and low-income consumers are "substantially overrepresented" among consumers with low credit scores.

"Despite finding no explanation for the alleged connection between insurance scores and losses, the FTC report somehow concludes credit scoring is valid and good for consumers," Birny Birnbaum has written. Birnbaum is a former insurance regulator who has studied insurance scoring for 15 years and now is executive director of the Center for Economic Justice. "This is not an impartial study," he said, "but simple advocacy for insurers."

What's not even mentioned in any of this is that there have been numerous studies that have shown that a majority of consumers have at least one error in their credit files. That could cause insurers to base your rates on flawed data.

All these points might lead you to wonder whether using credit scores to reward or penalize consumers with higher or lower insurance rates is fair or not.

While it could be good for the person with a good driving history and good credit, what about the person with a good driving history and bad credit? The latter's misfortune could be compounded by the fact that insurers will label that person a higher risk for filing a claim, which means that even though you're already having a hard enough time with your shaky finances, your poor credit will likely cause you to pay more to drive.

Way to kick a guy while he's already down.

Reach Consuming Interests by e-mail at [email protected] or by phone at 410-332-6151. Find an archive of Consuming Interest columns at baltimoresun.com/consuming

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