Credit Scores Unrelated To Risk Of Home Damage, Say Consumer Advocates
Sacramento, CA --- The Assembly Insurance Committee narrowly passed a measure today that would overturn Insurance Commissioner Garamendi's ban on the use of customers' credit history to raise homeowners insurance rates and deny coverage to potential homeowners with low scores. The crucial last vote for the bill sponsored by the insurance industry, AB 1454 (Calderon), was cast by Assemblywoman Montañez from San Fernando.
Consumer groups, privacy rights organizations and low-income advocates oppose the bill because there is no meaningful connection between a person's credit history and the likelihood that they experience a problem with their home, according to the Foundation for Taxpayer and Consumer Rights (FTCR). Also, the groups argue, credit scores are rife with errors and are frequently damaged by large-scale identity theft. Further, government studies conducted in Texas and Missouri found unequivocally that the use of credit scores to set insurance rates disproportionately affects low-income and minority consumers.
"Whether or not you pay your Visa bill on time every month has nothing to do with whether or not a windstorm is going to blow shingles off your roof," said Douglas Heller, executive director of FTCR. "Assembly Members caved to the insurance industry's desire to create a new way to overcharge homeowners for insurance."
ChoicePoint, a primary provider of insurance credit scores, recently revealed it lost control of the private information of tens of thousands of customers when it sold the information to identity thieves.
"We can't trust these companies to protect our private information, and we shouldn't give them the power to raise our insurance rates," said Heller.
Rules for setting credit scores vary from company to company, and the rationales are often absurd, notes FTCR. For example: A person with exactly four credit cards will have a dramatically better rating than someone with only one credit card, according to one credit scoring scheme used in Virginia. (It's even better to have 10 or more cards than to have zero or one.)
ChoicePoint dings homeowners for having credit accounts with auto parts stores. According to ChoicePoint: "Insurance industry research shows that consumers who maintain open accounts with vehicle related retail outlets have more insurance losses."
ChoicePoint also lowers insurance scores for homeowners who have sales finance accounts with a balance.
One company's scoring system considers a homeowner a worse risk if they've had 3 credit inquiries (from opening new accounts) in two years than if they've had a bankruptcy, foreclosure and legal judgment against them.
Credit Scoring Process Inherently Unfair
A summary of a 2004 study by the Missouri Department of Insurance reveals how credit scores are inherently unfair, particularly to members of disadvantaged communities:
1. The insurance credit-scoring system produces significantly worse scores for residents of high-minority ZIP Codes.
The average credit score rank in "all minority" areas stood at 18.4 (of a possible 100) compared to 57.3 in "no minority" neighborhoods -- a gap of 38.9 points.
2. The insurance credit-scoring system produces significantly worse scores for residents of low-income ZIP Codes. The gap in average credit scores between communities with $10,953 and $25,924 in per capita income (representing the poorest and wealthiest 5 percent of communities) was 12.8 percentiles.
3. The relationship between minority concentration in a ZIP Code and credit scores remained after eliminating a broad array of socioeconomic variables, such as income, educational attainment, marital status and unemployment rates, as possible causes. Indeed, minority concentration proved to be the single most reliable predictor of credit scores.
4. Minority and low-income individuals were significantly more likely to have worse credit scores than wealthier individuals and non-minorities. The average gap between minorities and non-minorities with poor scores was 28.9 percentage points. The gap between individuals whose family income was below the statewide median versus those with family incomes above the median was 29.2 percentage points.
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