Bill-payment history helps insurers set rates

Most people understand that if they run up a handful of speeding tickets, their car-insurance rates may go up. But many don't realize that paying a credit-card bill late could have the same effect – and unlike traffic violations, a bad credit report could boost their homeowners insurance premiums as well.

Property insurers nationwide have concluded that people with poor credit histories are more likely to have auto accidents and incur damage to their houses. The companies can't explain the correlation, but they say statistics show there is one.

Based on the findings, insurers are increasingly turning to credit reports and credit scores as tools in setting rates – and even in determining whom to insure. Legislators and regulators in many states are going along, at least so far, although a few states have banned or sharply limited the practice.

Consumer groups are scornful of the industry's findings. "I an unconvinced that failure to pay my Visa bill makes me a bad driver," says Ed Mierzwinski, of the US Public Interest Research Group.

But the insurance industry says it has indisputable evidence that credit reports and credit scores correlate very highly with the riskiness of homeowners and drivers. Some 90 percent of property insurers now use credit scoring in some way in their underwriting decisions, says Robert Hartwig, chief economist of the Insurance Information Institute.

The scores, which insurers say could indicate a lack of personal responsibility, enable carriers to identify good risks in such high-risk environments as old, urban areas and charge them lower rates, says David Snyder, assistant general counsel of the American Insurance Association, a property-insurer group.

When insurers are forced to use cruder measures, as they did in the past, "the good, responsible risks subsidize the lousy risks," he says.

Traditionally, insurers have rated drivers on the basis of such factors as age, sex, type of car, place the car is principally parked, and prior driving experience and record.

Homeowners are rated on the age of the home, its location and proximity to fire hydrants, its roofing material, the presence of smoke detectors, and other factors.

"Consumer groups have long complained about the old classifications, [which] they said were too broad. Now they are complaining about this," says Mr. Snyder.