Use of Credit Scores Fraught with Peril (Jan. 2003).
By Rob Schneider

The industry that brought us skyrocketing insurance rates is at it again. Now it claims using our credit histories to decide if we can get insurance is good for us. But some Texans might dispute the value of inflated rates and limited choices that come from the flawed use of insurance credit scores.

A woman in Channelview saw her auto insurance rates double -- despite a clean accident and ticket record. After much questioning, the insurance company admitted it was due to her credit score. A Corpus Christi man with no accidents or tickets and nine years with his company opened his bill to find his rates nearly doubled. Another man in the Metroplex who had six claim-free years with his insurance company found his rates increased as he was moved to an unregulated county mutual affiliate because of his credit score.

Credit histories and scores were developed as a tool for businesses that issue credit to see how good a job we've done paying our debts. Most people believe that a history of paying loans in the past should have some bearing on getting one today. But they are justifiably concerned when that same information is used for unrelated and unwarranted purposes -- such as deciding how likely their houses are to be hit by hail, or how bad a driver they are.

Yet this is exactly what insurance companies are doing in Texas despite the three strikes against credit scoring: it is inaccurate, bears no cause and effect relationship with insurability and is kept a deep dark secret.

A recent report from the Consumer Federation of America and the National Credit Reporting Association documents the inaccuracy of credit scores. The report concludes that tens of millions of consumers are at risk of being penalized for incorrect information in their credit report.

The report found that 31 percent of scores --about one in three files-- from the three major credit reporting firms vary as much as 50 or more points. The study also found significant problems with missing accounts -- meaning positive payment history may be excluded -- and inconsistencies about late payments, balances, and status of accounts.

Even insurance companies seem confused about the use of credit scores. In the recently proposed settlement against Farmers Insurance Co., the company allegedly gave the appropriate discount only to customers with the very highest credit scores, but ignored its own numbers for everyone else.

Credit scores can trump our driving records, too. According to testimony by Texas' Office of Public Insurance Counsel, many companies use credit scores more than they use driving records. In the case of one company, a bad score shifts you into an unregulated "county mutual" affiliate company -- with correspondingly higher rates. Another states that if you've got a high enough score, a motor vehicle record is not required. In other words, if your credit is good enough, it doesn't matter how many speeding tickets you have or red lights you run.

To make matters worse, insurance company underwriting criteria are secret, so the only way to know if our credit score has hurt us is to ask. . . . and ask again. They refuse to show regulators, legislators or customers their proof and documentation.

Undeterred, insurance companies continue to insist that their studies show a link between credit scores and losses. They assure us that -- despite frequent errors and highly selective use of the scores -- consumers benefit from their use. Really?

Under the harsh light of public scrutiny, insurance companies have started to blink, pledging to "reform" the most blatant abuses of credit scores. They pledge to tell us if they're using credit scores to decide if we can get insurance, and not use it as the "sole" criteria. They'll let policyholders submit an appeal -- to the insurance company -- to reevaluate their rates if consumers scrub their credit reports and find errors.

Insurance companies are missing the point. While they argue that credit scores work on average -- what do our scores have to do with driving ability or our likelihood of being hit by a strong storm? They pledge to let us appeal, but why should we have to cull through credit files and fight mistakes? Fundamentally, should we really trust the industry that brought us the homeowners insurance crisis in the first place?

Texas needs fair underwriting that assures anyone who must buy home and auto insurance gets a fair shot. We need an open process where the public can see the criteria against which they will be judged. And we need to independently evaluate whether factors like credit scoring make insurance more available to people, work to reduce losses, and don't unfairly impact any group.