Credit Reporting “Mission Creep”: Home and Car Insurance

If you’re planning to take out a car loan or apply for a home mortgage, you probably won’t be surprised that prospective lenders want to take a look at your credit report. After all, the ostensible intent of the credit reporting system is to use your past credit history to help lenders predict how likely you’ll be to pay back a new loan. But events become stranger once you’ve bought the car or house and need to insure your new property. Chances are, the insurance company wants to pry into your credit history as well. The result? If you’ve had difficulty paying bills on time, you’re likely to be paying more for home and auto insurance.

 Insurance companies’ use of credit reports is one part of the “mission creep” of credit information I describe in the recent Demos report “Discrediting America.”  Once purely the province of lenders, for-profit credit reporting agencies like Experian and TransUnion have marketed the use of credit information for a wide range of other purposes, from employment decisions to how patients are asked to pay for medical care at the hospital. It turns out insurance companies are also in on the game.

Insurers justify the use of credit screening for insurance purposes by pointing to internal industry data showing that, on average, people with lower scores are more likely to make an insurance claim. The problem is, they don’t have a convincing explanation for why people with poor credit tend to make more claims. If it was simply the case that people who are reckless with credit cards are also reckless drivers, we might not have cause for concern. But the industry has not been able to rule out the fact that this correlation is the result of “a factor that is not the fault of the consumer, or a factor that we as a society would want to ban as a justification for provision of service—such as race or income.”

If a correlation does indeed exist between credit scores and loss experience, consumer advocates point out that this may be due to disparities in wealth between individuals with high credit scores and those with lower scores.  Research has shown that upper income consumers have higher credit scores than low-and moderate-income consumers. Accordingly, as Chi Chi Wu of the National Consumer Law Project, and Birny Birnbaum of the Center for Economic Justice, point out in their report on credit screening and insurance:

Consumers with lower incomes and lower scores simply may have fewer financial resources, and thus be more likely to file a claim rather than “eating” the loss. For example, a Texas study found that while credit scores were related to loss experience, the correlation was due to a higher frequency of claims for low scorers, not a greater dollar amount per claim. This suggests that to the extent there is a correlation, it is because low scoring consumers are more likely to file claims, not because they actually sustain greater losses.

Whatever the mechanism, the result is that people with less money are likely to face higher costs for insurance. This gets to the heart of what is so disturbing about credit reporting mission creep in the insurance context or anywhere else: relying on credit reporting for such a broad array of economic decisions threatens to multiply and magnify existing inequalities, whether they originally stem from gender, race or ethnicity, economic status or anything else. This, as Roosevelt Institute fellow Mike Konzcal argues “is something to be fought tooth-and-nail.”