Paying bills late has unintended consequences for many Americans _ it makes their car insurance rates higher. And if a driver has a bankruptcy or financial turmoil in his past, coverage may be hard to afford or unavailable altogether.
In a practice drawing opposition from consumer advocates and scrutiny from state officials, auto insurers are relying more and more on credit scoring when making their rate decisions. More than half of auto insurance companies are now believed to use credit scoring in setting rates.
Industry watchers say the practice is gaining so fast in importance that, for some insurers, credit history carries more weight than driving record.
The credit scores, derived from a consumer's credit background, is a relatively quick and inexpensive way for insurers to underwrite and assess risk. They say it increases competition by enabling more companies to operate nationwide, while allowing them to reward financially responsible clients with the best rates.
"Financial stability is an extremely powerful predictor of future losses," said counsel Steven Sheffey of Allstate Corp., the Northbrook, Ill., car insurer. "It helps us write insurance, we can keep the cost of insurance less, and we also have a more fair underwriting structure."
But consumer watchdogs want the practice reined in out of concern that insurers, who are generally not required to disclose how they apply the data, could use credit histories unfairly. They also argue that credit scoring typically rewards white, affluent consumers while penalizing the poor and minorities.
"We worry about it because we think it might be a surrogate for prohibited factors such as race and income," said Robert Hunter, insurance director for the Consumer Federation of America, who urged Congress last month to push for more regulatory oversight.
About 20 states have introduced legislation to prohibit or restrict the use of credit scoring, and several have ruled it cannot be the sole determining factor in premium or underwriting decisions.
Insurers insist there's no discrimination, but as consumers learn about credit scoring, more are stepping forward to protest. Colorado's insurance department moved to limit how the scores are used after being barraged by complaints.
"It may work, from a statistical standpoint," said Colorado insurance commissioner William Kirven. "But it has to be used judiciously, and you have to not penalize people just because they have a low score."
June Dailey, 80, of Fort Lupton, Colo., got a notice this spring from her auto insurer, the Horace Mann Insurance Co., saying her monthly payments were rising to $61.12 from $41.49, a 47 percent increase attributed largely to her credit standing.
The retired schoolteacher says she's never paid a bill late and has had one accident in 64 years of driving _ a fender-bender seven years ago.
Dailey's problem is that, true to her Depression-era values, she pays for everything in cash. Because she has no credit cards, she has a very short credit history, though that history does include a perfect 47-year record as a Horace Mann client.
"I've paid my bills. I've tried to be trustworthy. And I feel like I'm being penalized for being an excellent customer," she said.
Horace Mann spokesman Paul Wappel says the Springfield, Ill., company considered a number of factors, including credit background, in raising Daley's premiums.
"Credit history provides a consistent, reliable tool to evaluate the risk of insuring someone without unfairly discriminating against any specific group of customers," Wappel said. No exception was made for her situation, he said, because "we have to treat everyone equally."
David Birnbaum, executive director of the Center for Economic Justice, said there's been no comprehensive independent study of a link between credit problems and car accidents.
"Even if there was a definitive relationship, that doesn't mean it has to be used," said Birnbaum, whose Austin, Texas-based non-profit group works on behalf of low-income consumers on insurance matters. "There can be errors in your credit history. And it could be penalizing people who simply encountered hardship and have chosen to pay medical bills instead of credit cards."
Addressing the issue in a 1998 study, the Public Interest Research Group found that 29 percent of 133 credit reports it examined contained serious errors.
Similar concerns have been raised involving the use of credit scoring to determine whether to grant home loans.
Birnbaum criticized state insurance regulators for moving too slowly to restrain a practice that has mushroomed with the proliferation of information available on the Internet.
Insurance companies' unwillingness to reveal specifics of their pricing decisions has added to wariness about the practice, according to those involved in the debate.
"Regulators are concerned about this and are actively looking into the veracity of the whole system," said Eric Nordman, research director of the National Association of Insurance Commissioners, which oversees the industry.
"I guess the jury's out on whether it's a good thing or a bad thing."
How it works
A look at the growing use of credit scoring by auto insurers, which increasingly use the ratings to set individual insurance rates:
CREDIT SCORING: Insurance risk score based on credit report information gathered by the three major credit bureaus _ Equifax, Experian and Trans Union.
BASED ON: Outstanding debt; length of credit history; late payments, collections, bankruptcies; new applications for credit; types of credit in use.
HOW TO LEARN YOUR CREDIT SCORE: Individual credit reports, FICO credit scores and explanations are available for $12.95 at www.myfico.com and www.equifax.com.
HOW TO IMPROVE IT: Pay your bills on time, pay down credit card balances, avoid new debt.