If your credit history changes, be prepared for a rate hike in your premiums

Insurance companies base their prices on risk. Drivers under the age of 25 have higher premiums because statistically they are more likely to have an accident.  Homeowners with a burglar alarm system get a discount because they tend to have fewer break-ins.

Okay, this makes sense.  But why do insurance companies consider your credit history when they set your rates?  What does that have to do with their risk?  If I lose my job and my credit score drops, am I really more likely to file a claim?

“Absolutely,” says Kenton Brine with the Property Casualty Insurers Association of America.

Brine admits this doesn’t make much sense to a lot of people.  But he says after 20 years of studies, the insurance industry can “absolutely prove beyond a shadow of a doubt” that credit scoring is correlated to risk of loss.

“It’s more accurate statistically than your driving record,” he says.

The insurance industry points to a study released by the Federal Trade Commission in July of 2007 that looked at credit scores and auto insurance. It concluded:

“(Credit Scores)” effectively predict the number of claims consumers file and the total cost of those claims. Their use is likely to make the price of insurance better match the risk of loss that consumers pose.  Thus, on average, as a result of the use of scores, higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums.”

In testimony before Congress in 2008, Robert Hunter, director of insurance for the Consumer Federation of America called the FTC study “substandard” because it relied on data “hand-picked by the insurance industry.”

Even so, he notes, the commission found that insurance scoring “likely leads to African-Americans and Hispanics paying relatively more for automobile insurance than non-Hispanic whites and Asians. Hunter told Congress insurance scores are really a “proxy for race” which should not be allowed.

‘Unfair and discriminatory’

Washington State Insurance Commissioner Mike Kreidler says even if there is a link between credit scores and insurance claims, “it’s unfair and discriminatory” to use this information – especially in the current economy. He wants Washington State lawmakers to ban the use of credit history, education and income to set rates. These factors can impact premiums by as much as 50 percent Kreidler says.

Insurance companies don’t use a score provided by one of the big credit bureaus. They create their own “insurance score” using their own criteria. It’s a secret formula; they won’t tell you how your score is computed. In many states, insurance companies aren’t even required to tell customers their credit history was used to set their premium.

“The secrecy behind this credit scoring is part of what makes it so inherently unfair,” Kreidler says. “No two companies use it the same way and when consumers ask, they can’t get a straight answer on how to get a better score.”

The Washington State Insurance Commissioner’s office has received thousands of complaints about this issue over the last few years. People report their rates were increased after the bank lowered their credit limit or canceled their card, or when they consolidated their credit cards, opened new credit card accounts or bought a large ticket item with deferred interest.

Source:By Herb Weisbaum msnbc.com contributor   http://www.msnbc.msn.com/id/35103647/ns/business-consumer_news//