Consumer Group Says Insurers' Use of Credit Scores Has Flaws

Credit scores are one of property insurers' favorite tools to separate the sheep, those who will get car and homeowners' insurance policies, from the goats, those who will be rejected or charged more.

Most states allow insurers to do this, albeit with some restrictions and many misgivings. Someone with a low credit score is more likely to live in an urban area, have a minimal or no bank account, and other financial problems. If banks aren't allowed to "redline" poorer neighborhoods, why are insurers able to discriminate against people who likely have more debt?

Insurance companies argue that drivers preoccupied with a child's medical bills are more likely to have an accident. Cars parked on streets in rundown neighborhoods are more likely to get stolen. And the debate got even more intense when the recession hit. The likelihood was that as people lost their jobs, credit scores would decline.

Not so, said insurers. The Insurance Information Institute cited figures from LexisNexis showing that credit scores actually improved a bit over the last five years. The theory was that the recession had given America a reality check, and people had actually begun to pare down their debt.

Not so fast, says Connecticut-based consumer advocate Sonja Larkin, who addressed the National Association of Insurance Commissioners recently. The statistics are skewed because soaring mortgage default rates, which have reached their highest levels since 1972, haven't been factored into the credit scores. As a result, people with good credit are also being hit by defaults.

As the old Buffalo Springfield song says, "There's something happening here, what it is ain't exactly clear." If enough people lose money, credit scores should go down and, in turn, people should pay more for insurance.

Evidence to the contrary is a bit hard to swallow.