Late with a credit card payment? Your auto insurance could go up.
A large number of automobile insurers are now using credit records to help price auto insurance, causing rates to jump for some unsuspecting consumers. In reaction, some state legislatures have passed laws curbing this practice.
But consumers shouldn't wait for changes from their state governments. Faulty credit reports could increase your rates unnecessarily. To a certain extent, you can take matters into your own hands by making sure your credit records are accurate.
How It Works
When determining your rate, car insurers weigh a variety of factors, such as age, driving record and vehicle type, to determine the probability that you'll file a claim. After plugging these variables into a formula, your risk is represented as a single number, called an insurance score.
Insurers are using credit history as a factor in determining insurance scores because they say it predicts the likelihood that a prospective customer will file a claim. "People with better credit scores tend to file far fewer claims than those with lower scores," says Joe Annotti, vice president of public affairs for the National Association of Independent Insurers.
According to a July 2001 study from Conning and Co., a financial industry researcher, 92 of the 100 largest personal-automobile insurers use credit data to underwrite new business. More than half of the companies say they had started using the practice after 1998. "After realizing credit was a predictor, insurers rushed to improve their competitive position," says Clarence Smith, who wrote the study.
Complicating the issue, insurance companies refuse to reveal how exactly they use credit histories to determine insurance scores. They want to keep their proprietary models secret from competitors, who could steal it, and from consumers, who could take steps, such as eliminating bank accounts, to artificially alter their insurance scores.
While people with lower credit scores may have a greater tendency to file insurance claims, opponents argue that there's no evidence that the link is anything more than a statistical anomaly. "We don't have any access to the models. Before, you always had a pretty good idea of why your premium went up or down," says Randy McConnell, a spokesperson from the Missouri Insurance Department, which has legislation pending to curb the practice at the state level.
For some people, premiums have doubled. McConnell cites complaints from the elderly, many of whom were raised during the Depression, who tend to shun credit in favor of cash and appear less creditworthy as a result. "It varies depending on the insurance company, but some consumers are looking at a 25% to 50% increase in their premiums," says Smith.
In reaction to consumer complaints, state legislatures have been attempting to curb this practice, concerned that automobile insurers are using the data to unfairly raise rates. So far this year, five states -- Washington, Idaho, Utah, Minnesota and Maryland -- have passed laws that restrict the practice. Another 26 have held at least one hearing on the matter, according to the NAII.
But most states have passed laws that only ban credit history from being the sole factor in determining a car insurance rate. As a result, your credit history could still influence how much you'd pay. Only Hawaii has a complete ban on using credit histories, according to the NAII.
Revisit Your Credit History
While state legislatures continue to debate the issue, the least you can do is make sure that your credit history is accurate. Because credit bureaus put the information they receive from creditors into a database, information about people with similar names is often mismatched.
"Approximately a third of credit records contain serious errors that could result in denial of credit," says Robert Pregulman, executive director of Washington State Public Interest Research Group. "Seventy percent had some kind of error, like an incorrect name, which wasn't serious enough to result in a denial of credit."
For example, if you are named after your father, make sure the credit rating agency isn't pulling his information. "Instead of owing $6,000, it could look like you owe $12,000," says Joanne Kerstetter, president of the Consumer Counseling Service of Greater Washington.
Begin by getting a copy of your credit report from each of the three credit rating agencies -- Equifax, TransUnion and Experian -- because information from each source could differ. Under the Fair Credit Reporting Act of 1997, if your insurance company has raised rates because of your credit history, you're entitled to a free copy of your credit report. A copy of your credit history costs just $9.
Next, check for glaring errors. Make sure your job title, name, salary and address are accurate, then scan for larger items, such as foreclosures and delinquencies. Be certain that all of the accounts on the report are yours and show the most up-to-date payment information. "The collection company isn't always motivated to tell them you've paid," Rhode says.
After identifying errors, inform the credit rating agencies of any mistakes in writing, providing evidence to support your claim. "Supply as much evidence as you can," Rhode says. "If you don't have enough, you might never get it fixed."
After receiving the letter, the credit agency has 30 days to verify that the information in your credit report is accurate. For example, if the agency isn't able to verify with a creditor that one of your accounts is still past due, such a black mark must be deleted from your report.
Be prepared to do some legwork. Rhode says it takes about 60 days to fix basic mistakes, even longer in cases of identity theft, where criminals use your personal information to apply for credit. Often times, he says, it's difficult to get creditors to believe it wasn't you. "You'll need to work at it, but the vast majority of erroneous information can be fixed quickly," he says.
In the market for a new car? Be sure to check back here on Sunday for our guide to buying a car online.