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The Best Little Money Book

Tip of the Month

Car Insurance Premiums –Your Credit Score and More

A Consumer Reports article in their September 2015 issue addresses how some insurance companies use your credit score to determine the premium you pay for car insurance. Insurance companies say the score helps determine how likely you are to have an insurance claim in the future. Only California, Hawaii and Massachusetts ban this practice.

This is not your typical FICO score but your credit-based insurance score. In addition to their method of scoring, insurance companies look at your driving history and history of claims.

The companies who use credit-based insurance scoring say that research predicts your potential for accidents. Two research projects seem to back them up. A 2003 study done by the University of Texas reported that people with lower scores have a greater potential for claims. This results in more losses for the insurance company. A study by the Federal Trade Commission found this method to be a good predictor of risk. Here are the links to both studies.

In addition to credit-based insurance scoring, insurance companies are using “price optimization". In this case you may find your rates go up even though you have never had a claim or even when you are loyal to your insurance company. Price optimization may be used to determine how likely you are to shop around for insurance to get a better price and how likely you are to complain about an increase. These states do not allow insurance companies to use this method to set car insurance premiums – California, Vermont, Washington, Florida, Maryland and Ohio.

Price optimization is an analysis of big data to determine how a person will behave when given a different price. Companies are using this to set pricing and for promotional and discount pricing. Big data is a buzzword to describe large volumes of data that cannot be processed with traditional software.

These programs can also look at data that is not related to car insurance, like how many iPhones you have and which company you use for TV service

Here are some suggestions given by Consumer Reports on how you can protect yourself from unfair pricing:

  • If you receive an adverse action notice you should request an “extraordinary life circumstance exception.” You would receive an adverse action notice when the terms are changed because of your credit score. Terms could be higher premiums, less coverage, denial of coverage or cancellation of coverage.
  • Look at your credit report for errors. Ask the insurance company to rescore you after corrections are made.
  • Use national brand credit cards instead of store band cards and limit new credit.