Using credit scores as a factor in determining automobile insurance eligibility and premiums is a standard industry practice. For years, insurers have maintained that a person's scores, originally intended to measure creditworthiness, also are a predictor of whether - and how often - someone will file an auto insurance claim.
And for years, consumer groups have urged state legislatures and the federal government to see the flaws in that practice.
Consumer advocates say using credit scores to set insurance rates unfairly hurts blacks and Hispanics because those groups tend to have lower credit scores and thus end up paying more for their auto insurance. They also complain that errors in credit files can result in lower scores and thus higher insurance premiums.
The Federal Trade Commission recently weighed in on the debate, releasing a study that largely sides with the industry.
The Fair and Accurate Credit Transactions Act of 2003 charged the FTC with investigating the use of credit scores in setting auto insurance rates. Among other things, the FTC was asked to determine the effect of credit-based insurance scoring on certain groups of consumers, such as low-income and minority consumers.
Insurance companies began to use scoring in the mid-1990s. Today, all major automobile insurance companies use the credit-based scores in some capacity, according to the FTC report.
The FTC, using prior research, public comments and industry data, concluded that credit scores predict the number of claims consumers file and the total cost of those claims.
The Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center and the Center for Economic Justice issued a joint statement criticizing the FTC's methodology.
"The FTC's approach to collecting data for the analysis is like the federal government trying to do a study on the health impacts of tobacco use with data selected by tobacco companies for the study," said Allen Fishbein, of the Consumer Federation of America.
One of the five FTC commissioners, Pamela Jones Harbour, also took issue with the agency's findings.
"I distrust the integrity of the underlying data set upon which the study was based," Harbour said.
Commissioner Jon Leibowitz, who voted to release the report, said that although the analysis appears to find insurance scoring did predict the risk of insurance claims, "the differences in credit-based insurance scores across racial and ethnic groups are a disturbing reminder that our society is - still - not race blind, and that vestiges of our history of discrimination remain ever-present."
The insurance industry, however, was pleased with the FTC report.
"We believe scores reduce subsidization of bad risks by good ones, meaning most consumers pay less for insurance," said David Snyder, vice president and assistant general counsel for the American Insurance Association.
Certainly consumers should practice good financial habits such as paying their bills on time and limiting their use of credit. But should someone pay more for auto insurance because he or she lost a job and couldn't pay his or her credit card bill?
"Insurance premiums should be based on the risk of an accident, not a consumer's bill-paying record for other goods and services," said Norma Garcia, a staff attorney for Consumers Union.
After assessing all the research and the data from the industry and after hearing 200 comments from the public, the FTC still couldn't determine why there is correlation between low credit scores and the increased likelihood that someone will file an auto insurance claim.
If you don't know why, then how do you know the practice is fair and unbiased?
FTC commissioner Harbour said the agency failed to provide a more "balanced discussion of the benefits and detriments of using credit scores and credit-based insurance scores."
On that point, I concur.