Insurance Costs and Credit Ratings

We recently posted a commentary about how we had learned that accepting offers from retailers for price breaks if we applied for their credits cards was costing us in insurance costs. The September 2015 issue of Consumer Reports has an article about their extensive two year study of insurance costs. One of their conclusions is that, “The way insurers set prices is shrouded in secrecy and rife with inequities.” Their study resulted in study of “…2 billion car insurance price quotes from more than 700 companies with the greatest share of customers in all 33,419 general U.S. ZIP codes.” What they found “…is that behind the rate quotes is a pricing process that judges you less on driving habits and increasingly on socioeconomic factors. These include your credit history, whether you use department store or bank credit cards, and even your TV provider.”

Reading the entire article and our own experience with having higher insurance costs because of taking out more credit cards leads to the conclusion that insurance companies have found a way to artificially increase costs for customers, which of course increases their profits. Insurers “cherry pick” elements in credit reports in a proprietary manner. Some of the results are quite astonishing. The study found that “…single drivers who had merely good scores paid $68 to $526 more per year, on the average, than similar drivers with the best scores, depending on which state they called home.” Credit scores were found to have more impact on rates than driving records. Having a moving violation in Kansas increased rates by $122 per year while having only a good credit rating increased rates by $233. A poor credit rating would add an average of $1,301 a year. Another trick being used is called “price optimization,” which is prohibited in a six states. It uses data about how much of a price increase will trigger you to shop around for a better price.

One suggestion is to shop around, because there is some truth to the ads that say “People who switched to our company saved and average of…” Of course there were people who didn’t switch who aren’t included in that average. California, Hawaii, and Massachusetts prohibit insurers from using credit scores to set prices. Perhaps those of us in the other states should begin a campaign with our insurance commissioners to have our state added to that list. Page 37 of the magazine has a petition you can mail to Consumer’s Union.

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