Credit history may not predict homeowners' insurance claims

Insurers' reliance on credit scores in establishing insurance risk may be unfounded

Insurance companies have long examined consumers' credit scores, reasoning that people with lower credit scores will file more insurance claims.

A 2003 study at the University of Texas seemed to bear this out - but the study only looked at auto insurance claims, not those on homeowners' insurance. And even though lower-scoring consumers had more auto insurance claims, their claims were not necessarily higher than those of high-scoring people.

Insurers are legally permitted to request consumers' credit scores, thanks to the Fair Credit Reporting Act. But consumer groups have raised concerns about the use of credit scores to place consumers in insurance tiers. "You can get a statistical connection on a lot of different things," said Robert Hunter of the Consumer Federation of America in a 2006 SmartMoney article, "but that doesn't mean you should use it."

And a Texas insurance department follow-up to the 2003 study raises doubts about the efficacy of credit scores in predicting insurance claim behavior. The follow-up determined that credit scores' correlation to homeowners' insurance claims is inconclusive.

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Posted: October 21, 2009

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