Premiums and your credit score

In the same way that insurers use ZIP codes to predict claims, so referring to your credit score can also work very unfairly. The way it works is easy to explain. The actuaries who collect statistical information about all the traffic accidents recorded by the police and emergency services are good at finding patterns. Sometimes, there are accident hot spots where the road design is bad or the maintenance poor. It can also be a people issue where there are high levels of theft or vandalism. These clusters, once identified, are a real blot on your financial landscape. You will be charged a higher premium based on your address. It’s the same when it comes to credit score. There are also patterns showing people with low scores are more likely to claim. In part, poor people use older vehicles and have less cash to spend on maintenance and repairs. This can contribute to accidents.

But, there’s a different statistical link when you put the two factors together. Hispanics, African-Americans and other immigrant groups are more likely to live in “doubtful” ZIP code areas and have poor credit scores. Yet, of course, this is just one of those statistical anomalies. Race has never been a factor in setting insurance rates in our land of equal opportunity.

In one sense, using credit card data may be a useful factor when put into a proper context. So, people going through a divorce, who have recently lost their jobs or who are going through the foreclosure process may be easily distracted and make poor drivers. Except, of course, credit records do not come with detailed notes on your current circumstances. Without there being protections in place, reliance on the score can be unfair. What makes the problem worse is the assumption the score is always accurate. In fact, a survey made about six years ago found there were mistakes in the credit records of up to 80% of adult Americans. In the majority of these cases, the errors were not significant but, because the scores are used when you are looking for a place to rent or for a new job, it’s wise to make sure the records are accurate. In this, remember there are three major credit rating agencies and each draws its data from slightly different sources. This can mean there are mistakes in only one set of records.

To help you ensure accuracy, Congress passed the Fair and Accurate Credit Transactions Act of 2003 (FACTA). This gives you the right to get one free copy every year from each of the credit bureaus! So, no cost and only benefit if you find mistakes and have them corrected. As the time for getting your first or renewing your auto insurance policy comes around, check the data. If you get improved credit scores, all the auto insurance quotes coming back to your searches will be lower. Indeed, if you discover mistakes in the credit scores, you should contact your insurer. The honest companies will give you a refund on the premiums charged. What can be better than that!