Watching Over You: Costs of Bad Credit
Stephanie AuWerter
Aug 26, 2001
Can Bad Credit Boost Costs Of Automobile Insurance?
These days, having black marks on your credit report may mean more than paying a higher interest rate on your credit card.
More companies -- many of them having nothing to do with offering credit -- also are scrutinizing the data on those reports to decide whether to do business with you, and how much to charge.
Nowhere is the practice growing faster than in automobile insurance. As many as 92% of the 100 largest personal-auto insurers now use credit information when they write new policies, according to a study by Conning & Co., an insurance-research and asset-management firm.
More than half of this group started using the data within the past three years. And 52% of companies responding to the survey use credit history not just to decide whether to insure you, but also to help determine your premiums.
Many insurance companies argue that credit history can be a good indicator of the odds that a policyholder will file an auto-insurance claim. But what's not clear is why. "We're not sure," says a spokesman for Allstate. "But we know it's a fact."
Accident-Prone?
There are some theories. Someone having financial problems could be under more stress, which could lead to more accidents. Others theorize that someone who handles finances well is likely to be conscientious about other aspects of life, including driving.
But some consumer groups aren't buying it. "What's next?" says Robert Hunter, director of insurance at the Consumer Federation of America. "Color of hair? Left-handedness? You can get a statistical connection on a lot of different things, but that doesn't mean you should use it."
The figure insurers use to evaluate you, your insurance score, is similar to a credit score, but it's not quite the same. And just because you have a good credit score doesn't necessarily mean you've got a good insurance score, says Craig Watts, a spokesman for Fair Isaac, which provides the formulas used to crunch the scores.
Your insurance score gives a greater weighting to factors such as whether you've paid your bills on time, and for how long you've done so, he says. Less weight is given to the amount you owe. (Some insurance companies use other, proprietary scoring systems.)
Not Available
Unlike your credit score, you have no way of finding out what your insurance score is, since it's not made available to consumers.
Just how much your insurance score matters depends on where you live, since insurance is regulated at the state level. It also depends on the insurance company you use.
At Farmers Insurance, for example, a poor credit history could cost you 35% to 40% more in premiums, depending on the state in which you live, according to Greg Ciezadlo, vice president of auto-product management. Chubb, on the other hand, doesn't use credit data at all.
And while insurance companies say that a poor insurance score alone shouldn't be enough to deny you coverage, that may not always be the case, according to Gerri Detweiler, author of "The Ultimate Credit Handbook." She found a 1999 study of insurance companies in Virginia revealing that 16% of new applicants were denied coverage because of poor credit, while 19% of policies were not renewed.
"If you have unusual circumstances or go through tough times, that could cost you in many ways," Ms. Detweiler says. "And that's scary for the average consumer."
Stephanie AuWerter is a an associate editor at SmartMoney.com. E-mail: sauwerter@smartmoney.com.
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