Your Car and Your Credit

Using credit scores in determining automobile insurance eligibility and premiums is a standard industry practice. For years, insurers have maintained that a person's scores, originally intended to measure creditworthiness, are also a predictor of whether -- and how often -- someone will file an auto insurance claim.

And for years, consumer groups have urged state legislatures and the federal government to see the flaws in that practice. Consumer advocates say using credit scores to set insurance rates unfairly hurts African Americans and Hispanics because those groups tend to have lower credit scores and thus end up paying more for their auto insurance. They also complain that errors in credit files can result in lower scores and therefore higher insurance premiums.

The Fair and Accurate Credit Transactions Act of 2003 charged the Federal Trade Commission with investigating the use of credit scores in setting auto insurance rates. Among other things, the FTC was asked to determine the impact of credit-based insurance scoring on certain groups, such as low-income and minority consumers.

Recently, the FTC released a study that largely sides with the industry. The commission, using prior research, public comments and industry data, concluded that credit scores predict the number of claims consumers file and the total cost of those claims.

Insurance companies began to use scoring in the mid-1990s. Today, all major automobile insurance companies use the credit-based scores in some capacity, according to the FTC report.

The Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center and the Center for Economic Justice issued a joint statement criticizing the FTC's methodology.

"The FTC's approach to collecting data for the analysis is like the federal government trying to do a study on the health impacts of tobacco use with data selected by tobacco companies for the study," said Allen Fishbein of the Consumer Federation of America.

One of the five FTC commissioners, Pamela Jones Harbour, also took issue with the agency's findings.

"I distrust the integrity of the underlying data set upon which the study was based," Harbour wrote.

Commissioner Jon Leibowitz, who voted to release the report, said that although the analysis appears to find insurance scoring does predict the risk of insurance claims, "the differences in credit-based insurance scores across racial and ethnic groups are a disturbing reminder that our society is -- still -- not race blind, and that vestiges of our history of discrimination remain ever-present."

The insurance industry, however, was pleased with the FTC report.

"We believe scores reduce subsidization of bad risks by good ones, meaning most consumers pay less for insurance," said David Snyder, vice president and assistant general counsel for the American Insurance Association.