Minorities have Lower Credit Scores, FTC Reports

African Americans and Hispanics have lower credit scores than whites and Asian Americans and generally pay more for auto insurance, according to a study released yesterday by the Federal Trade Commission. The study also found that credit scores are effective predictors of insurance claims that consumers file, according to the FTC.

The study found that whites and Asian Americans are evenly distributed across the credit score range. In contrast, African Americans and Hispanics are over-represented in the lowest score ranges and under represented in the higher score ranges.

For African Americans, 26 percent are in the group with the lowest 10 percent of credit scores, while 3 percent are in the group with the highest 10 percent of scores. For Hispanics, 10 percent are in the group with the lowest 10 percent of credit scores and 5 percent are in the group that receives the highest 10 percent of scores.

In comparison, about seven percent of whites are in the group with the lowest scores and about 12 percent are in the highest scoring group.

The study also found that consumers in the lowest credit score group were twice as likely to file an auto insurance claim as those in the highest credit scoring group.

The FTC conducted the study under the 2003 Fair and Accurate Credit Transaction Act (FACTA) directing federal agencies to review the effect of credit-based insurance scores on consumers. The agency used data from 2000 and 2001 provided by five auto insurance firms that accounted for 27 percent of the market in 2000.

Four of the five FTC commissioners approved the report. Commissioner Pamela Jones Harbour wrote a dissenting opinion, saying she distrusted “the integrity of the underlying data set” used to create the report and disagreed with the report methodology, saying it “fell short of the Commission’s gold standard for rigor and completeness.”

The FTC said its “Credit-Based Insurance Scores: Impacts on Consumers of Auto Insurance” study was designed to review whether race and income played a factor in credit scores, the relationship between scores and risk, how scores impacted prices paid for auto insurance, and whether other scoring models could be created that predict risk “as well as current models and narrow the differences in scores among racial, ethnic, and other groups of consumers.”

The FTC said the study showed that scores “effectively predict the number of claims consumers file and the total cost of those claims.” Generally higher risk consumers pay higher insurance premiums while lower risk consumer pay lower premiums, the FTC reported.

Scores are different among racial and ethnic groups and this impacts the premiums that consumers pay, the FTC found. The agency said it wasn’t able to develop a scoring model to replace current models.

Credit scoring proponents have said that a consumer’s score is based on their credit history. Creditors use scores to determine a consumer’s credit quality, and typically a consumer’s score impacts any lending decision a creditor makes about that consumer.

Earlier studies in Texas and Missouri on race, credit scores and auto insurance came to similar conclusions as the FTC, the agency reported.