Two summers ago I was in Michigan visiting my father when he received a notice from his insurance company that he didn’t get the best rate on his auto insurance, due to his credit-based insurance score. My father never pays his bills late, he just doesn’t use a lot of credit. That cost him about $10 a month in higher premiums.

When I bought the house I live in five years ago, I was told I was just 14 points shy of the score needed to get the best discount on my homeowner’s insurance. That cost me about $100. Again, my credit was excellent, I had little debt, and even with my background in credit, I couldn’t pinpoint the exact problem.

Welcome to the crazy world of insurance scores, a variation of those credit scores we’ve all heard so much about lately.

A recent report, entitled Score Wars: Consumers Caught in the Crossfire by Norma P. Garcia, senior attorney with Consumer’s Union says that the use of credit information in insurance is “unfair and unnecessary.” The report cites several problems with insurance scores, including:

1.    They are still a mystery -- “black box” as the report calls them -- and no one outside the companies that create and sell them knows for sure how they are calculated. The question is, are they fair and accurate? And what exactly can you do if yours isn’t stellar?
2.    Garbage in, garbage out. We all know that credit reports contain mistakes. And even if they are accurate, they may not accurately reflect credit risk (for example, when insurance companies haggle over medical bills after an auto accident and they end up in collections!)
3.    They are potentially discriminatory, resulting in good drivers in lower income groups and or ethic neighborhoods who may have more limited credit histories paying more. The report describes research, including a study by the Missouri Department of Insurance to back up their position on this controversial argument.

Citing another insurance scoring critic, Birny Birnbaum the report also warns that consumers with good credit scores may pay more than they did before insurance scores were used. And that is the argument most relevant to my personal experiences. 

Because before credit scores were used, the insurance company wouldn’t be able to tell my dad he had to pay more for auto insurance because his house has been paid off for years, and he doesn’t like to carry debt. Before credit scores were used, I couldn’t have been dubbed a higher risk because, well, who knows exactly why?

Of course the insurance company would likely argue that without the use of credit scores I would have paid more anyway, because the scores weeded out the higher risk customers and made insurance pricing fairer overall.

Maybe, but I do have my doubts.

How about you? How do you feel about the use of credit information by the insurance industry? Do you agree with Consumers Union and Birny Birnbaum that it should be stopped? Share your feedback with us below.