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Study finds bad credit's costs

Insurers say scoring system is fair; others call it discriminatory

08:48 PM CST on Monday, January 3, 2005

By CHRISTY HOPPE / The Dallas Morning News

AUSTIN - A sweeping state study has found that Texans with bad credit histories tend to file more insurance claims. But it also shows that blacks and Hispanics are disproportionately more likely to be hit with higher premiums because of low credit scores.

The study of 2 million policyholders released Monday led insurance industry officials to claim vindication for using credit scoring, saying there is a statistical correlation between insurance losses and consumer credit. But consumer advocates argued that the statistics do not indicate that the factors leading to a poor credit rating also cause more insurance claims. Instead, they said, the study showed the rating system is discriminatory and should be ended immediately.

"This study shows that credit scoring is nothing more than economic redlining," said Alex Winslow, executive director of the consumer-oriented group Texas Watch.

He said whether someone was late with an electric bill is not a predictor of insurance risk. "We need to employ the common sense test," Mr. Winslow said. "Does it make sense that if I have bad credit, that I am more likely to have a hail storm hit my home or have my car run into by a drunk driver?"

Sandra Ray, a spokeswoman for Southwestern Insurance Information Service, said the study showed that credit scoring is a statistically valid, color-blind tool that insurers can use to determine future risk.

"The interest groups are trying to turn this into something about race. It's insulting," she said. "What is fair is that no matter what my ethnicity, I should be rewarded with lower premiums if I've got a good credit score."

Mark Hanna of the Insurance Council of Texas said credit scores are a measure of responsibility and are factored into apartment leases, home sales and job offers.

"Credit scores are an underwriting factor that an individual can control and improve. By paying bills on time and managing their finances, policyholders can see a marked improvement in their credit score, which can lead to better insurance rates," Mr. Hanna said.

The study is the product of a 2003 insurance law, which allowed the use of credit scoring but required the state to examine how the information was used by insurers.

The study by the Texas Department of Insurance showed that more than about 54 percent of homeowners and 82 percent of auto insurers use credit scoring to help determine premiums and make other decisions about the policy. Credit scoring also could cause rates to vary as little as 11 percent but also zoom as high as 400 percent.

A statistical breakdown showed that for auto policies, minorities made up almost 65 percent of the drivers with the worst credit scores, while white drivers made up 90 percent of those with the best credit scores.

The insurance department is examining more closely the underlying factors of credit scores to see whether other variables are involved, a study that should be complete by the end of the month, said Jim Hurley, a department spokesman.

He described that an assortment of variables - age, car model, where you live, how far you drive to work - are part of the formula used to get an auto insurance premium.

"Credit scoring is one of those variables used as well," he said. "We need to see how credit scoring provides any additional predictive abilities beyond what the traditional variables are."

Birny Birnbaum, executive director of the Center for Economic Justice, said he believes credit scoring causes higher insurance rates for low-income and minority consumers.

He and other consumer groups called on Insurance Commissioner Jose Montemayor to at least cap how much a credit score can affect a premium.

E-mail: choppe@dallasnews.com