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January 19, 2018

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Credit history plays role in driver rates


August 21 - 22, 2004

Of all the factors that go into determining the cost of a driver's auto insurance policy one of the most controversial is the use of that person's credit history.

The federal Fair Credit Reporting Act passed by Congress in 1970 authorized insurers to consider credit history but it wasn't until the early 1990s that the use of credit reports became widespread within the insurance industry.

Insurers defend the practice because they say there is a correlation between individuals who have a lot of credit accounts and make late payments and drivers who file a higher number of claims for bodily injury and car damage.

But critics say the use of credit history has nothing to do with a person's driving record and argue that the practice discriminates against low-income motorists.

This dispute came to a head in the Nevada Legislature last year when the Democratic-led Assembly approved a bill to ban the use of credit reports, only to have the legislation die in the Republican-led Senate. Instead, a compromise was reached that allowed Nevada insurers to continue to use credit reports with the following stipulations:

Insurers must notify policyholders in writing when credit history is factored into the cost of the policy.

Insurers must not take into account inquiries made of a person's credit history by others.

A policyholder cannot be penalized for making late payments related to medical care.

Assemblyman Kelvin Atkinson, D-North Las Vegas, a co-sponsor of the Assembly bill, said that despite the legislative compromise he is still not supportive of the use of credit history in determining auto insurance costs.

"We just feel that the credit scoring system affects certain people unfairly," Atkinson said. "People with bad credit ratings are paying higher insurance rates but we don't think that bad credit correlates with bad driving.

"I don't think that they should have credit scoring as a rating mechanism. The insurance companies have so many other criteria they can use."

The use of credit history was defended by Samuel Sorich, vice president of the Property Casualty Insurance Association of America, who testified on behalf of insurers when the Assembly was considering its bill. Sorich, based in Sacramento, Calif., said studies show a correlation between poor credit and a propensity for filing insurance claims.

"The level that credit history is used varies among companies," Sorich said. "Some companies put a heavy reliance on credit history and others do not.

"The research has shown that a person with a moderate number of open credit accounts is less likely to make insurance claims than someone with many open credit accounts."