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Mellody Hobson is talking to us about a troubling new report on how our credit scores are used.

Mellody: We all know that our credit score – which is calculated based on a number of factors, such as paying our bills on time – impacts what interest rate we get on a car loan, or the credit limit we have on our credit cards.

But a new investigation from Consumer Reports looked in to how your credit score affects your auto insurance rates, and the findings are shocking. Consumer Reports found that your insurance company is judging you less on your driving habits and increasingly on socioeconomic factors.

Was there a big difference?

Mellody: It varied by state, but in some cases the difference was huge.

The results were especially bad for people with poor credit scores, but even those whose scores were good but not excellent saw negative consequences.

Consumer Reports found that single drivers who had merely good scores paid $68 to $526 more per year, on average, than similar drivers with the best scores, depending on the state they called home. Nationwide, drivers with good scores paid an average of $214 more annually than their neighbors with the best credit scores. But in some states, the differences were drastic.

In Florida, a single adult driver with a clean driving record but poor credit paid an average of $3,826 annually for their car insurance. In comparison, a driver with a clean driving record and excellent credit only paid $1,409. That is a difference of $2,417! Even a driver with good credit paid $312 more than his counterpart with a top credit score! Perhaps most shocking, a poor credit score seems to have a larger influence on auto insurance rates than a drunk-driving conviction in some instances!

What do companies say about why they use credit scores?

Mellody: As you can imagine, the insurance companies have not been very forthcoming about how they use credit scores and why. Esurance, an online agency, said that research shows that credit score predict accident potential, and that statistical analysis shows that those with higher credit scores tend to get into fewer accidents and cost insurance companies less than their lower-scoring counterparts, though they are not sure why.

Are there any other ways that credit scores are used for non-financial decisions?

Mellody: Car insurance isn’t alone in the insurance world. You credit score is also used to determine your homeowners insurance premiums, as statistics show that there is a correlation between high credit and fewer insurance claims. And if you did not already know, employers will run a credit check as part of your background check when you apply for a job. While it is not usually a determining factor (depending on the field you work in), many employers will check your credit report.

 Do you think there will be a push to reform the insurance industry’s system?

Mellody: I think there will be some movement on this front, especially since everyone is mandates to have car insurance with the exception of drivers in New Hampshire.

Obviously, judging people by their credit history and not their driving disproportionately impacts minorities, as we have lower credit scores on average than white Americans.

Consumer Reports ended their article on the piece calling for action, saying their investigation illuminated some of the worst practices by demonstrating the real cost to consumers in dollars and cents, and that they want join forces with consumers to demand that insurers—and the regulators charged with watching them on our behalf—adopt price-setting practices that are more linked to how you drive, and not to who they think you are.

 

Mellody is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS news and CBS.com.

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