Laser-guided Red-lining

Here's another article on an issue that burns me up. Auto insurers are using customers' credit ratings as a factor in pricing their insurance. The upshot — poor people pay more than rich people do. (See this earlier post.)

As James Baldwin says, "It's expensive bein' poor." And it's not just auto insurance. More and more, credit rating is being used for all kinds of things other than extending credit. And in every case, what it means is that people with low credit scores (i.e., the poor) are charged more for the same services than people with high credit scores (i.e., the wealthy). This is ass-backwards, unjust, illogical.

But consumer groups aren't buying the link between your credit data and your driving record. And they say it's unfair to punish people who suffer unexpected financial woes with higher insurance rates. Say you get sick and get slammed with high hospital bills, or you lose your job or get divorced, why should you have to pay higher premiums on your car on top of everything else?

"The part that gets me is blaming the victim. They're trying to blame people who've been victims of financial or medical catastrophes," says Birny Birnbaum, executive director of the Center for Economic Justice in Austin, Texas. "The notion that you would penalize people like that with higher auto and homeowner insurance rates is unconscionable."

Exactly. Insurers argue that credit ratings are a reliable indicator, and there is a high correlation between lower credit ratings and more frequent insurance claims. Right. No actuary worth their abacus would accept the slipshod and arbitrary junk mathematics of the credit rating system as the basis for any defensible calculations.

They may as well use the signs of the Zodiac and then claim that "studies show a high correlation between Capricorns and higher claims, therefore we're justified in charging them higher rates."

All this amounts to is a higher-tech, laser-precision version of redlining. You're no longer allowed to fleece poor and minority people based on neighborhood demographics, so instead you fleece them one-by-one, based on their credit scores.

  • Patrick (G)

    mmmm,
    there is some sense in charging higher risks higher premiums.
    It’s not something that’s only done to ‘poor people’, it’s also done to companies, towns and states that issue bonds…the worse their credit rating/score, the more they have to pay in interest before anybody will think of buying their bonds.
    As far as medical catastrophes becoming financial catastrophes, that says more about the unfairness of our Medical system than anything else.

  • derek g

    Insurance is a competitive industry. Accordingly, companies are always trying to segment the market. If they don’t others will, and take their more profiable customers. Insurers aren’t in the business of lowering rates for better credit risks, but they realize that if they don’t, some other insurer will, and will steal these customers by offering them rates reflective of their individual risk.
    Another way to look at it: If people who pay their bills in a timely manner can be shown to be a better risk than people who do not, why should they not recieve a premium more reflective of the risk? Why should they subsidize those other risk classes?

  • Fred Clark

    My problem here is that “credit rating” is based on a whole lot more than simply paying one’s bills on time. Parts of this measurement seem arbitrary and counter-intuitive (paying off your car loan, for instance, can hurt your credit rating).
    Free market arguments for auto insurance would be more compelling if this were not a compulsory product. Demand is mandated by law, which makes claims of competition-driven pricing somewhat suspect.

  • charles

    Arguing that insurance companies should use credit ratings
    in their fee schedule is ludicrous. The previous comments seem to be divorced from reality in the same way republican “logic”. A persons credit rating has absolutely nothing to do with their accident risk. And the fact that a person who inherited a million dollars can buy a car on credit then have his accountants pay it off.. thus giving him great credit.. and he can do this for everything he buys thus giving him a golden credit rading, pretty much makes the whole system laughable. While a working person may have a catastrophe happen and may get behind on their bills for one or two months and have their credit rating trashed. This is simply the furtherance of the Autocratic system growing in america. Of the Aristocracy.. by the aristocracy and for the aristocracy… with the serf classes being merely a farm of assets to be reaped by that aristocratic class.

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