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Credit-Based Car Insurance Rates… A Bad Idea?

Posted by Sean | Posted under Cars, Insurance | August 29, 2008

Shan at The Apostle of the Turtle wonders,

"Is it just me, or is it a stretch to assume that your FICO score—which measures your loyalty to the act of borrowing money—is an accurate barometer for determining how well you drive?"

As I found in By The Numbers: Credit Scores and Car Insurance, most insurers use credit scores and the impact on car insurance rates can be significant.

Is it a stretch?

For people who object to the impact of credit ratings and car insurance, is it a question of statistical validity, or a matter of general principle?

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3 Comments so far
  1. Shan August 30, 2008 12:46 pm

    Thanks for the trackback!

    I can understand that if I make poor decisions to misuse credit (rack up huge balances, miss payments, and so on), my FICO score decreases. In this case, I could be considered a person who creates unnecessary risk and that could easily translate to risks I take behind the wheel.

    What concerns me is that my decision to not use credit cards has caused my FICO score to decrease, which has in turn caused my insurance rates to increase.

    In my case, the FICO score is not a reliable gauge for how risky of a driver I might or might not be. In fact, I could argue that my FICO score is decreasing because I’m taking on less financial risk, which shows I’m inherently not a risky individual, so why don’t I get a discount?

  2. Sean September 1, 2008 9:10 pm

    I agree that some people who avoid credit would figure to be low risk. Although I wonder what % of people fit that profile, versus credit users.

  3. Terry September 7, 2008 8:46 pm

    The statistical model needs further development and refinement.

    There are many reasons why a person’s credit is good or bad, or why it rises or falls.