What does a credit report have to do with the quality of a person’s conduct?



The question stems from a personal financial setback.

My 16 year old daughter got her driver’s license this month, which I just learned will double our household auto insurance premiums. We used to pay $ 678 every six months, but now we will pay $ 1,276 every six months.

Yay.

Now I know where I’m going to spend the automatic child tax credit. I was so happy about two weeks ago.

This exorbitant price is typical of young drivers, who are guilty until proven innocent from the point of view of insurance companies.

Another culprit factor until it is proven to be innocent used by auto insurance coverage is the credit rating. The worse or thinner your credit, the more you pay.

It’s counterintuitive. Why should people with clean driving records pay more for their insurance because they are behind on their credit card bill or just don’t have a credit report? Driving and using credit responsibly are clearly distinct skills.

The practice of using credit scoring in insurance products and pricing is the subject of active debate at federal and state levels. In Congress, New Jersey Senator Cory Booker and Michigan Representative Rashida Tlaib have proposed banning it.

The insurance industry argues that the historical correlation between lower credit scores and a higher number and higher dollar value of damage claims justifies the use of credit score in rating.

In Texas

In June, entrepreneur Nestor Hugo Solari moved his auto insurance start-up, Sigo Seguros, to Austin and launched a new program in the state targeting the Spanish-speaking population.

One of the selling points of Sigo Seguros is that it ignores personal credit scores when purchasing insurance. He considers the practice to be discriminatory, particularly against Spanish-speaking Texans. To further attract its target audience, the company will also not need a traditional state driver’s license. Customers can provide a foreign driver’s license while receiving coverage at no extra charge.

The typical Sigo Seguros customer, according to Solari, seeks liability coverage only and may forgo collision coverage because he drives older, less valuable cars.

I’ve written about this before, but from a personal finance perspective, I favor this auto insurance flavor. We need strong protection against catastrophic liability. But we don’t need car damage protection because for personal finance reasons people shouldn’t drive valuable cars. Above all, I hasten to add, with a new 16-year-old driver behind the wheel.

I refuse to insure against damage to my 2009 Hyundai, which has a trade-in value of approximately $ 2,000. What is damage insurance for that kind of value? The thing is almost worthless on purpose, just the way I like it. I am therefore saving a little by declining collision coverage, as many Sigo Seguros customers do.

I asked Solari about her problem with credit scores. He pointed out that the Spanish-speaking Texans his company seeks to serve may have slim or no credit records due to recent immigration status or because the community is relatively underfunded compared to English speakers in the state.

I have confirmed with my auto insurance company that they take personal credit into account when determining my premiums. Texas insurance rules allow credit scoring as a pricing factor as long as it is not the only factor considered. Some states, including California and Massachusetts, have banned personal credit as a factor because of potentially discriminatory effects.

Other factors are also important, such as kilometers driven, car density as measured by postcode and driving record.

In theory, what is a fairer method of pricing auto insurance?

Critics of the use of credit scoring argue that observed driving behavior and driving record are what should matter most. They are also right.

Enter Big Brother

In recent years, auto insurance companies have experimented with telematics, which provides data directly to businesses about customers’ driving style based on a phone app that tracks everything from hard acceleration and braking to night driving and texting while driving.

Sigo Seguros offers a discount to customers who sign up for its mobile phone-based telematics system, seeing it as a better way to measure driving risk.

I was interested to learn this because I signed up about a year ago in an app that offers a discount to allow my insurer to track my driving experience. My insurance company’s app even alerts me to sudden braking and using the phone while driving. It probably also tracks the total number of kilometers driven.

This kind of driving data strikes me as fair enough, because it measures factors that might increase the likelihood of car accidents that credit scores, for example, don’t. This is the ultimate goal – fairness in auto insurance based on observed risk behaviors. And fairness is good.

The downside to telematics is that Big Brother – in the form of my auto insurance company – watches me while I’m driving.

It makes me paranoid about my ability to get away with crime in the future, which is really negative. On the positive side, I get 3% annual savings on my auto insurance premiums!

We are now paying through the nose because of my teenage driver. Eventually, I’ll have to rob banks just to pay for auto insurance, but auto insurance telematics will increase my chances of getting caught. A classic Catch-22.

Speaking of watching Big Brother, and by the way, I really enjoyed the idea that Bill Gates could track my every move since I got the Pfizer COVID-19 vaccine.

Do you know what’s crazy about this particular worry? We all carry smartphones everywhere! It is the real tracking device that records all our movements. It’s not the vaccine. Please, for the sake of McKenzie Scott and all that is beautiful in this world, get your shot if you haven’t already.

Michael Taylor is a columnist for the San Antonio Express-News and author of “The Financial Rules for New College Graduates”.

michael @ michaelthesmart

money.com | twitter.com/michael_taylor



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