Fight over credit scoring

Insurance: Maryland would be second state to ban use of credit history in insurance policies.

April 03, 2002

HOW WELL you manage money and keep up with credit card bills can tell an insurance company more than you think. Like the risk you pose for filing auto insurance claims.

At least that's what the insurance industry says. To put it simply: Consumers who are good money managers also take good care of their homes and drive carefully -- and they should get better rates as a result.

The practice is called credit scoring, and if you haven't had your insurance canceled or premium tripled because of it, you probably didn't know it existed. But as irate consumers have spoken out, there have been calls to restrict the use of credit scoring because of inherent inequities.

As many as 23 states have considered legislation to restrict or ban the practice. In Maryland, credit scoring cannot be used solely for underwriting and setting rates on auto insurance. A bill to expand that restriction to homeowners insurance evolved into an outright ban.

Insurers insist there's a correlation between credit history and insurance risk. That may be, but the companies cannot explain the connection. Some even say it's not necessary to know why. They argue that this is just one tool that allows them to more accurately price their product.

A credit score is based on a person's debt, length of credit history, late payments, bankruptcies, number of credit cards, types of credit. But a limited credit history, because someone prefers to pay in cash, would likely result in a poor score.

The system might not take into account that, say, a catastrophic illness would adversely affect credit history, or a layoff due to an economic downturn.

Unlike age or driving record, it's hard to imagine how a bankruptcy filing relates to driving safely. "If you get into medical debt because a beam fell on you, does that mean your house is going to catch on fire more rapidly?" asks Brad Scriber of Consumer Federation of America. "We would think not."

Neither do we.

Some opponents say credit scoring unfairly affects minorities and the poor. Neither those claims nor the industry's can be substantiated because of the dearth of independent studies on the subject. Until that kind of analysis is done, it makes sense to ban the practice.

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