Credit scores have traditionally been used to determine the creditworthiness of applicants for financing. Lenders routinely use scores to establish the likelihood that payments will be made on time and that loans will be repaid in their entirety. In an increasing and controversial trend in the automobile, home, and other insurance-related products, major agencies are using the credit scores of their clients to establish policy premiums.

The concern many credit-industry experts have is that agencies are not using these credit scores to determine whether someone will pay on time, but rather to speculate about the number of claims someone is likely to file and the resulting costs of such claims. As most studies have indicated, individuals who face a financial crisis typically regain their financial footing within twenty-four months of these events. The use of insurance scoring can unfairly result in higher premiums affecting individual’s long-term costs. These higher costs put individuals in a difficult position when they try to build an appropriate savings account and plan for life events such as retirement.

Further complicating the subject of insurance scoring is the fact that no independent studies have been conducted regarding the reliability of using credit scores to set insurance rates. In addition, there are about fifty million Americans with limited or no credit history at all. For those who do have credit profiles, there’s another alarming fact to contend with: an estimated 70% of all credit reports contain errors.  

Let’s examine the issues surrounding the use of credit scores in assigning automobile insurance, as an example of the challenges this practice produces. Using the old method of calculation, which factored in the type of car you drive along with your age, driving record, marital status, how far you drive back and forth to work, and where your cars are garaged, makes complete sense ; however, using a score that is, at times, nonexistent or unreliable is problematic.

Your credit score is based on information contained in your credit reports. Consumers should regularly review their credit reports for inaccurate or incomplete entries anyway, but especially in states where insurance companies are allowed to use credit scores to set insurance rates. To order a free copy of each of your credit reports (Trans Union, Experian, Equifax), visit www.annualcreditreport.com. If you do not have access to the Internet, you may request your reports by telephone. The toll-free number to call is 877-322-8228. You may also order you reports by mail; however, you will need to send a form that is accessible only through the Federal Trade Commission Web site. Mail your completed form to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA, 30348-5281. You can access the form at www.ftc.gov/credit.

If you find inaccurate or incomplete entries,  file a dispute with each credit-reporting agency that lists inaccurate information. Your dispute should be in writing and contain: (1) your complete name and address, (2) a clear identification of each item in dispute, (3) an explanation of why you’re disputing the information, and (4) a request that an investigation be initiated. Be sure to include copies (NOT originals) of documents that support your claim. Send your letter by certified mail, return receipt requested, so you have proof that your claim was received. Also keep copies of your dispute letter and enclosures for your records.

Insurance agencies are required to review the credit history of each policyholder every two years, but clients can also request that their insurer review their report once during a policy term. Following such a review, the insurer can only give an individual the benefit of any improvement in their credit history. The review cannot be used to increase premiums in the event that an individual’s credit profile has deteriorated since the original application for the policy.

Thom Fox is a public speaker and personal finance author who has helped develop programs for young people and adults. He can be reached at thomjfox@comcast.net