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Debate over credit score validity continues

A good credit score has long been touted as an important factor when applying for a job, renting an apartment, setting up utilities or securing a variety of consumer loans.

An individual's credit history also plays a role in determining auto insurance rates. In this case, something called a credit-based insurance score - or an analysis of a credit history used to determine the likelihood an applicant will file a future claim - is used as part of the method to determine an auto insurance premium.

This definition from the Insurance Information Institute is not to be confused with an individual's credit score which is used as an indicator of a borrower's ability to repay a loan, says the group.

But given the ongoing economic turmoil affecting big banks on Wall Street and companies worldwide, consumers have faced record job losses, plummeting home prices and sometimes mounting debt.

Deteriorating economic conditions have taken a toll on the personal finances of many consumers - leading them to make late payments on credit cards or even find themselves with a reduced line of credit from their bank. Some of these actions have an effect on their credit score and are noted in a credit history.

Policy makers and consumer advocates in a number of states have been outspoken more recently about the affect the economic crisis has taken on consumers and some have called for unprecedented action against banks and credit card companies thought to have deceived consumers.

Some lawmakers are also saying that credit-based scoring by the insurance industry is unfair to consumers who have come under financial pressure in the last year.

States including Connecticut, Michigan and Florida have looked into the possibility of eliminating the use of credit scores when determining auto insurance premiums. A bill in Connecticut proposes eliminating the use of an individual's credit history if they experienced a life changing circumstance such as identity theft or extended job loss within three years of applying for insurance.

But at a hearing late last month of the National Association of Insurance Commissioners' property and casualty committee and market regulation and consumer affairs committee, Robert P. Hartwig, president and economist for the Insurance Information Institute, defended the industry's practice of using credit-based scores, even during an economic downturn.

"Credit-based insurance scores are highly accurate predictors of risk (expected loss) irrespective of the economic environment," Hartwig said in his testimony citing the nearly "universal" acceptance of the practice over the last 10 years.

"It is a common misconception that during a recession virtually all consumers' credit scores and hence insurance scores will fall," he said noting that the score is one of many factors used to determine rates.

Hartwig explained, "Credit-based insurance scores are never used as the sole underwriting criterion. Auto insurance premiums, for example, are based on a myriad of factors such as driving record, previous losses, the type of car driven, miles driven and where the consumer lives."

On the other side of the battle, the director of insurance for the Consumer Federation of America, J. Robert Hunter, reportedly cited statistics that show inconsistencies among credit reporting from major agencies and consumers with no significant credit history that could be at risk for an unfair assessment.

Hunter's comments were reported by BestWire Services in a story that also said credit-based insurance practices had been the subject of numerous state and federal studies hoping to find the best resolution to concerns from both parties.

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Posted: May 06, 2009