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Poor Credit Score Raises Home Insurance

Roseman: Poor Credit Score Raises Home Insurance Cost
By Ellen Roseman
May 17, 2011

Most Ontario consumers don’t realize their credit scores can determine what they pay for home insurance.

When they find out, they want to ban using credit scores in home insurance – just as credit scores are banned in car insurance.

“Isn’t it about consistency?” asks Bryan Yetman, chairman of the Insurance Brokers Association of Ontario (IBAO).

“If we have a philosophy that we don’t use credit scores for one product, shouldn’t we extend it to those buying another product?”

In the IBAO survey, 75 per cent were unaware that a poor credit score could lead to higher home insurance rates and 76 per cent wanted to extend the ban on their use.

The group has launched a consumer website, www.soaringinsurancerates.ca, with two goals: (1) Educate people about the practice. (2) Urge them to reach out to their local MPP, demanding a ban.

I support this campaign and want to do my part in increasing awareness. Here’s why I oppose using credit scores to determine home insurance rates.

It’s discriminatory. Credit scoring for home insurance can raise premiums for those with low to moderate incomes.

The burden falls more heavily on widowed and divorced couples, newcomers, the unemployed, young people with limited credit histories and small business owners tapping into credit lines to keep their firms afloat.

Most Ontario home insurers are using credit scores to increase rates by up to 100 per cent for customers who don’t measure up.

This adds to the cost of living for people already facing price increases for gasoline, electricity and other daily staples.

It’s not disclosed. When you apply for credit, the lender asks permission to check your credit score. You must agree before the application goes ahead.

When you apply for home insurance or renew a policy, most insurers don’t ask permission to check your credit score. That’s why consumer awareness is so low.

“The way the application is worded, it gives the impression that credit scores will be accessed only at the time of a claim,” Yetman says.

Not many companies send explicit letters to customers, as Co-operators General Insurance did when adopting the practice in June 2009.

“If you do not allow us to access your credit score, we will respect your wishes,” said Coseco Insurance, a Co-operators affiliate.

“However, we will not be able to provide an accurate or competitive premium that reflects the risk we are insuring. As a result, you will not receive the best possible premium available.”

This means you can have excellent credit and still pay higher premiums if you deny access to your credit records by your home insurer.

It’s arbitrary. The Ontario government passed new rules last September to stop auto insurers from requiring customer consent to collect credit data before providing a quote or offering to renew a policy.

Politicians were concerned about the right to privacy. They also felt there was little research, especially in Canada, showing a poor credit score was linked to the frequency and severity of insurance claims.

So, why allow the practice to continue at all? What difference does it make that car insurance is mandatory for drivers, while home insurance is optional for property owners and renters?

On the contrary, I’d say home insurance is mandatory for those who are still paying off mortgages or using lines of credit secured by their home equity. Lenders insist they have an insurance policy before approving a loan.

Meanwhile, renters would be crazy not to insure their belongings from theft and damage from water or fire.

It’s dangerous. Credit reports can be wrong. I often hear from people struggling to erase mistaken information from their records.

Ontario’s two credit bureaus, Equifax and Transunion, don’t make it easy to check your credit record for free by mail. Their websites showcase the charges you have to pay for instant access to your credit record.

At least a credit record is based on facts, which can be amended or changed. That’s not the case with a credit score – a newer measure not governed by any provincial legislation.

With a credit score, judgment comes into play. The credit bureaus blend your credit history with other factors to come up with a three-digit score, using computer algorithms not disclosed to the public.

I think credit bureaus are too secretive and have too much power already. So, why are we allowing them into the insurance field?

Finally, if you’re turned down for home insurance because of a credit score, you may find other companies won’t take your business. You could be blackballed and forced to self-insure.

There isn’t a non-profit insurer of last resort that makes coverage available to everyone, as the Facility Association does with car insurance.

Let’s stop using credit scores in insurance. It’s unfair and hurts consumers.

Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca.