Letters to the Editor

Credit crunch

March 6, 2008

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To the editor:

Before you open another credit card think about this:

I received a form letter saying that my auto/home insurance rates went up because my insurance score, which takes into account my credit rating, was not the highest that it could be. I pay my credit cards on time, in full, so per instructions I ran two credit reports from the specified Web site. Both showed perfect records, although I was surprised that cards with zero balances that hadn't been used in years, marked as inactive, showed up.

After filing an automated report of objection with the company that compiled the insurance score, I contacted my local insurance company. An agent there informed me that because we had recently changed from my husband (who has no credit cards) being designated "head of household" to me (who has credit cards) being designated head of household, our insurance score had changed. My husband's credit score was the highest it can be, I was told. Mine was not because I had several credit cards, she said. As a result our insurance went up over $200 for a year! How can this be legal?

This practice raises the question of why the cost of auto and home insurance can be based on credit ratings? Aren't they based on the value of the cars and homes (with other environmental factors considered)? And why are we always told by financial advisers that we should open credit cards and pay them in full to achieve a good credit rating? Before you do that, I recommend you think twice.

Sara Henderson White,
Oskaloosa

Comments

workinghard 7 years, 5 months ago

Try American Family, they don't use credit ratings to determine your premiums.

nettieb 7 years, 5 months ago

Credit scores are the justification a whole lot of industries use to charge people more money.

Yet another perk of living in a capitalist society.

kansas778 7 years, 5 months ago

nettieb (Anonymous) says:

Credit scores are the justification a whole lot of industries use to charge people more money.

Yet another perk of living in a capitalist society.


100% correct. Instead of charging everyone more money, they give those with better scores a discount. Just another way that our society rewards responsible, intelligent, hard-working people, and not lazy bums.

OnlyTheOne 7 years, 5 months ago

Kansas778 you make the assumption the reporting companies have a perfect system - they don't! Hopefully one of these days you'll be in there, day after day, proving to them the data they have is inaccurate while you watch your credit rating crumble, insurance rise, interest rates rise, credit limits plummet and credit in general disappear. Once again I say. Think more, type less.

jafs 7 years, 5 months ago

If the above letter is accurate, it is odd. Most banks/credit counselors advise using credit cards in order to boost one's credit rating.

I believe it is better from the credit point of view to pay monthly payments rather than paying off the card in full each month (another strange credit phenomenon).

When I was younger and had no credit cards, didn't own a home or car, and lived within my means, I was unable to get credit because I had no credit history.

How is that rewarding responsible, intelligent people?

beawolf 7 years, 5 months ago

Working hard.. You are wrong. My AF homeowners went up this past year. Reason cited...change in credit score. I am now with Allstate.

Godot 7 years, 5 months ago

I don't think it is a reward for responsible behavior as much as it is a realistic expectation that people who take on risks in their financial life will be inclined to do so in other areas of their life, therefore making them more likely to do something that will cause them to file an insurance claim.

There are statistics to back this up.

I hope Mrs. White had the insurance company change the insurance back to her husband's name. I also hope Mrs. White did not cancel her inactive credit card accounts; in some perverse way, that would actually cause her credit score to go down.

kansas778 7 years, 5 months ago

OnlyTheOne, you need to think more and type less. You know, sometimes people get wrongly convicted of a crime. Should we scrap the whole system because it isn't perfect? Hear ye, hear ye. If any system that could negatively affect someone isn't absolutely perfect, we must do away with it.

I find your "I hope you suffer" line to be pretty silly and without thought. You can only come up with a pathetic anomalous example where it would not be fair. So let's see, unfairly punish all the people with good credit, or a few who get a mistake in their report and have to work to get it corrected. And BTW, a person who suffers a harm as a result of an inaccurate credit report is not with a remedy:

Consumer's claim of violation of Fair Credit Reporting Act (FCRA) provision requiring credit reporting agencies to "follow reasonable procedures" to assure accuracy in credit reports requires proof that: (1) credit report contained inaccurate information; (2) inaccurate information resulted from agency's failure to follow reasonable procedures; (3) consumer suffered damages; and (4) damages were caused by inaccurate information. Fair Credit Reporting Act § 607(b), 15 U.S.C.A. § 1681e(b).

You'll get attorney's fees, and you can even get damages for emotional distress. If the credit reporting agency did follow reasonable procedures, then you can sue those who supplied the false information for libel. So try to think some more, or just type less.

WHY 7 years, 5 months ago

At least it is not as biased as using gender to determine auto insurance. You can control your credit score but not your sex organs. I had to pay double the insurance my sister did when I was in high school. Now I pay less because I have good credit. The universe is starting to level things out.

nettieb 7 years, 5 months ago

Think what you want, 778. If a policy's price is raised 300 and someone with perfect credit is given a 300 discount, it is not a reward for them. It's kinda like raising the price of clothing then putting it on sale. They are still charging the same amount for it in the end, only with insurance, they can get even more out of someone with a less than 800 credit score. Using the psychology behind credit scores is a sham. What do people try to do when they want to raise their credit score? They get another credit card or a mortgage or a new car, buy, buy, buy. What's the incentive to raise your credit score? Lower interest rates, insurance rates, etc. How do you get them? Spend money. They are all in bed with each other. You are a fool if you think they are rewarding you for being responsible.

gemini 7 years, 5 months ago

I know a lot of people are upset about this issue, but my rates with American Family went down $400 this year. I've gotta say, I'm a fan of the credit based insurance rating. With all of the financial turmoil in the news right now, I'm glad I'm being rewarded for being responsible and prudent with my money. It gets tiring to hear so many people instead expect the government or the mortgage companies or everyone else under the sun to pay for their mistakes and foolish decisions.

nettieb 7 years, 5 months ago

Our rates have gone down as well, so the whole credit issue isn't really a bad one for me either, but it is what it is and for someone to believe it is a benevolent gesture from corporate America as a reward for responsibility is about as as naive as believing that the FDA is really looking out for Joe Consumer and not big pharma.

kansas778 7 years, 5 months ago

Nettieb, you're too much kid. Evil "corporate America" eh? LOL, watch out for that boogeyman, he's out to get you!

Anyway, sometimes, a business will do things to try and keep a customer, not as a benevolent gesture, but as a sound business practice. You'll understand when you're older.

nettieb 7 years, 5 months ago

I'm willing to bet I'm much older than you, 778. That must be why you don't get it yet.
I don't think they're evil. Its capitalism, of which I participate whole heartedly. If you pay attention to what's going on, and do some research, one day, you will too learn that, while I'm sure in your world, we all eat rainbows and crap butterflies, it is not so..

Evan Ridenour 7 years, 5 months ago

"You can prove anything with statistics, even if the 'proof' is extremely slanted and inaccurate."

Sorry to burst your bubble but the entire insurance industry is only around BECAUSE of statistics. Insurance companies like any other company are in the business to make profit. How do they make profit? They have to make sure that the balance premiums with the risks of the people they insure to make sure that at the end of the day they end up with more money. There are lots of studies that have been done showing a very strong correlation between credit scores and risk. On top of this, the industries own data back up the studies.

This is the same exact reason why auto insurance is more expensive for younger adults (and males). It isn't BS they made up to charge you more, it is the result of millions of dollars being spent studying the relationships between different aspects of people and the risk those people represent.

There is a solution to the problem you seem to be having with the industries current practices. Instead of charging premiums based on risk the industry could just charge everyone equally.

Somehow I doubt that is what you really want.

Sigmund 7 years, 5 months ago

The Insurance business, like virtually every business, is very competitive and the various companies compete with each other on price and service to get and keep their customers. If they price their products too high they get fewer customers and miss out on profits, too low and they lose money, The bottom line is that getting it just right maximizes their profits.

So how do they attempt to get it just right? Actuarial science. How much to charge today to cover the risk of loss in the future. Like the saying goes, prediction is very hard especially of the future. If your Insurance rates go up, look to move your business. If the other offers are all about the same, then you are a higher risk.

People who live in certain areas of town and park on the street have a greater risk of filing a vandalism or theft claim. Older people are at a greater risk of needing health care. People whose credit dramatically declines are at a greater risk of moral hazard (filing fraudulent claims). All of these factors, and many more, are legitimate basis for determining the rates to charge individual customers.

As for credit scores being higher for those who use credit cards and don't pay them off immediately, there is no mystery there. Would you prefer customers who pay off the balance immediately (you earn little or no interest) or those that pay only a portion of the balance without fail (you earn interest for loaning money but the borrower has a long history of not defaulting on the principle). If you were putting your money at risk who would you prefer to lend to?

I've posted this link many, many times. If you have broadband and want a fascinating and balanced view of the credit card business, be sure to check out the award winning (2004-05 Emmy Award for Outstanding Investigative Journalism) "The Secret History of the Credit Card" produced by Frontline and first broadcast on PBS. http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/

Sigmund 7 years, 5 months ago

Multidisciplinary (Anonymous) says: "And while the links may state this, it's good to just point out in a post..The credit business is the most profitable business of all. This is proven. Not just credit cards, some businesses are set up for selling something, but where they make their money is financing that same purchase."

Ever wonder why that new car cost less IF you finance with the dealer? Because General Motors, Toyota, Ford, Honda, et. al. make far more money from financing than on the car itself, a loan secured by the car they just sold you!

Ever wonder why KU offers specially branded VISA's or MasterCards? You guessed it, they get a cut of the action. How is this all possible? Not by lending to the rich and wealthy who don't need revolving credit. Nope, the real money is made by lending at slightly higher rates to people who are at slightly higher risk, the "sub-prime" borrowers (thats you and me). Does that phrase ring a bell? When the economy is growing overall credit card defaults run less than 1%. When the economy slows defaults go higher, but surprisingly not by much, and the credit card business gets tighter with its lending. No new iPod for you!

So why not fix the amount credit card companies can charge? As soon as you do credit card companies will refuse to extend unsecured revolving credit to higher risk customers, students, blue collar workers, those without a credit history. Set it too low (below the cost they pay for their money plus expenses) and they will simply make no loans to those that don't have substantial assets, the very rich.

So you want to cut into credit card company profits and at the same time use their money? Don't let them charge you interest by paying your balance on time and in full, they will hate you.

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