Consumers Union testing facilities in New York.

Consumers Union President Jim Guest: Factoring Credit Scores Into Auto Insurance Premiums is "High-Rate Robbery" (Oct. 2002).

In his "Memo to Members" in the October 2002 issue of Consumer Reports, Consumers Union President Jim Guest calls for every state to ban insurance companies from using credit scores to set rates. "Recently, while researching the causes behind soaring auto-insurance rates, Consumer Reports found that the most controversial new addition to the rate-setting formula is your credit score," states Guest. "For decades, auto insurers have focused on identifying drivers at higher risk of filing a claim … and have charged higher premiums to those at higher risk. While risk-based pricing has problems, it's basically a fair system."

A New Way to Raise Your Rates: "Now, however, insurers have discovered a new formula that can double your insurance premiums, even if your driving record is pristine. It's called the insurance score, and it's based on the premise that bad credit makes you a risky driver.

"There is no standard mathematical model for this, and the social implications are unsettling. One insurance commissioner told us that insurers use credit scores to do what is otherwise illegal - discriminate against low-income and minority consumers. Down-on-their-luck consumers, who may have skipped a payment or two because of layoffs, medical problems, or divorce, could find that a less-than-perfect credit score is driving their auto-insurance rates through the roof, even if they have always paid their auto-insurance bills on time and have had no accidents or speeding tickets.

What You Can Do: "When shopping for a new policy, demand that insurers tell you how your credit score will affect your premium. Examine your credit reports for errors, and have mistakes corrected as quickly as possible. Pay bills on time, don't apply for instant credit, and don't max out on credit cards. Shop around; you may save by switching companies or consolidating all your insurance coverage with one firm. And complain to your state insurance commission.

What States Should Do: "Consumers Union has long recommended that states require insurers to fully disclose their loss data so that independent analysts, and consumers, can learn what's really driving rates. The insurance industry has resisted that recommendation every step of the way.

"States can fight back, and their victories can set precedents that affect rates across the country. In Maryland, for example, companies are not permitted to use credit scores when you renew your policy - only when you apply for a new one. They can impose a surcharge but, if you ask, must tell you how much you'd pay without it. Companies are required to review your credit every two years, or when you ask them to, and to adjust your premium if your credit has improved.

"Even those steps don't go far enough. Every state should ban companies from using credit scores to set rates. … We will continue to fight any tactics that prevent consumers from buying coverage under fair terms."

The entire text of Jim Guest's column "High-Rate Robbery" can be found on page 7 of the October issue of Consumer Reports magazine or at www.consumerreports.org.