Consumers with bad credit history may be very familiar with the various negative ways this can affect their lives. In many states, one relevant way bad credit can harm an individual is through his auto insurance, since insurers often use credit scoring information to determine premiums.
Explanations for why bad credit and a high number of insurance claims may be correlated are usually intuitive, such as the commonly-given justification that people with good credit are likely to be careful drivers, according to MSN.
However, four U.S. states forbid insurers from using “insurance scoring”, and the Consumer Federation of America has advocated a ban on this practice. According to the news source, the causal relationship between bad credit and many insurance claims has yet to be proven.
Furthermore, the news provider mentions several studies that suggest insurance scoring may have been abused. Consumer Reports found that insurers’ use of credit information can be arbitrary, and a study done in Texas reportedly found that insurance scoring tends to hurt ethnic minorities disproportionately.
According to a report issued by the Government Accountability Office, two-thirds of Americans did not know that their credit scores can affect their insurance policy, and those with bad credit may benefit from knowing that insurance scoring exists, and knowing the arguments for and against the practice.