Credit scores and car insurance: if you don't succeed, try again

Three congressmen recently proposed a bill that would eliminate credit scores from the list of factors used by car insurers to determine rates.

The bill, H.R. 6129, titled the Ban the Use of Credit Scores in Auto Insurance Act,  would amend the Fair Credit Reporting Act so that reports on consumer credit can't be used in the underwriting process. It was sponsored by Reps. Hansen Clarke (D-Mich.), John Conyers Jr. (D-Mich.) and Bennie Thompson (D-Miss.) and was referred to the U.S. House of Representatives Financial Services Committee

"The cost of insurance for everyday people is simply too high," Clarke said in a July 16 post on his Facebook page. "We have to end insurance rating factors that are unfair. Companies penalizing citizens for their credit score and other 'redlining' practices must end."

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Michigan’s car insurance premiums rank as the country’s third most expensive, with 2012 models averaging $2,013 a year. Mississippi came in at No. 19 at $1,502, according to a Quadrant Information Services analysis of insurance rates.

Conyers, in a July 12 Facebook post, said, "Auto insurance rates should be based on your skills and responsibility behind the wheel, not extraneous factors outside your control."

Credit scoring as part of the underwriting process is controversial. Consumer groups believe that credit history has nothing to do with how safely you drive, punishes those with financial troubles and discriminates against minorities and low-income drivers.

Insurers contend that data show that there is a high correlation between credit history and the number and cost of claims filed –statistically, they say, people with poor credit file more claims. (See: "How does my credit history affect my home insurance and car insurance rates?")

The current status of credit scoring and car insurance

Three states -- California, Hawaii and Massachusetts -- prohibit the use of credit information in setting auto insurance rates.

Michigan several years ago banned credit scoring for personal insurance lines, but the Michigan Supreme Court in 2010 lifted the ban after insurance companies sued. However, there are still restrictions on what insurers can do with credit data.

Michigan state insurance scoring rules signed into law in early July say carriers can't use insurance scoring to levy a surcharge or to determine insurability, but can use the information to provide discounts to those with good credit. Additionally, insurers can use credit information and insurance scores to determine options and availability for premium installment payments.

Carriers also must provide policyholders and applicants explanations of which credit factors were used when the company takes any action based on their credit histories.

Credit history is just one of many factors insurers evaluate when setting car insurance rates. They also consider your driving record, age, where you live, your marital status and the model of car you drive as well as other variables.

Improving your credit history to get cheaper car insurance rates

No one is perfect. If you have a less-than-stellar credit report, there are steps you can take to polish your record. To improve your credit:

• Get free copies of your credit reports through AnnualCreditReport.com, review them and follow instructions for correcting any factual errors.
• Try to catch up on late payments to creditors and pay your bills on time.
• Maintain credit card balances under 30 percent of credit limits.