From Our President

This monthly letter to subscribers from Consumers Union President Jim Guest highlights the critical consumer issues behind our current reports. See archived letters.

Another misuse of your credit record

Determined to lower your home-insurance costs, you installed a burglar alarm, reinforced the roof, and upgraded your electrical system. No one has slipped on your walkway. You adopted a Persian cat instead of a pit bull. So why on earth is your homeowners insurance going up?

Maybe it's because you paid a few bills late. Not insurance bills but, say, the one from the department store or your cable company, which dinged your credit record, which in turn dinged your insurance score, which raised your rates. (See our article on homeowners insurance.)

Insurers say that the way you manage your finances is a good predictor of whether you'll file a claim, so they comb through your credit record and pluck out bits to feed into a secret formula. The resulting insurance score is different from your credit score, but the idea is the same: A formula that you don't see makes predictions about you based on information in your credit file.

Unfair and opaque

Insurers don't have to divulge the score or the formula to consumers. Consumers Union and other consumer groups think that using credit information to refuse customers, raise rates, or cancel policies is dirty pool.

In a very few states, regulators agree. California, Hawaii, and Maryland ban the use of credit records for at least some kinds of insurance. Most of the others have some minimal restrictions but generally allow the practice for insurance policies.

We think that using credit-based data for insurance should be banned entirely. It's unnecessary; companies have other, more predictive ways to assess current and potential customers. And it's unfair to consumers, especially in the current economic climate, when job losses are wreaking havoc on the finances of so many families.

Jim Guest
President