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Ask Dave

Zero Credit Score Impacts Insurance Rates?

A Twitter listener asks if car and homeowner's insurance is more expensive with a zero credit rating. Dave says yes and explains why.

QUESTION: A Twitter listener asks if car and homeowner’s insurance is more expensive with a zero credit rating. Dave says yes and explains why.

ANSWER: Yes. The only alternative, though, is to pay lots of credit card interest, car loan interest, and constantly be screwing around and playing kissy-face with the banks all in order to keep a FICO score up. Your FICO score is 100% based on your interaction with debt. It is not an indication you are winning with money. Your FICO score is an “I love debt” score. You’re going to pay a bazillion dollars in interest to keep your FICO score up in order to have lower homeowner’s and car insurance rates.

I think eventually that the insurance industry is probably going to get a class action lawsuit against them for this. There is actual data that indicates a higher credit score means you are less likely to have a claim or file a claim, and when you do, it’s a smaller claim. So people with higher credit scores tend to not cost the insurance companies as much. There is actual data that backs that up. The problem with that is that they did not add to the thing the widow who’s worth $10 million and has a $500,000-a-year income off of her investments and hasn’t borrowed money for 40 years. She’s not going to have many insurance claims either, by the way. She will be a money-making customer for the insurance company.

While a lower credit score can be justifiable for having higher insurance rates, a zero credit score—most of the time—is an actual indication of huge levels of financial health because it means they don’t have any debt and haven’t had any debt. Someone like me who doesn’t borrow money—very conservative, has a huge pile of money, a bunch of paid-for property—I should not be punished as if I’m someone who is going to run up an insurance bill because I don’t have any money. There’s some faulty logic in the insurance industry’s move on this, but like a lot of things in our culture, they have fallen prey to the stupid idea that they can find one number that gives them everything they want. Then, they’re relieved of their requirement to think. When you relieve someone of their requirement to think by giving them a number, that means you’re dumbing down your industry. That’s what’s happened to banking. That’s what’s happened to mortgages. It’s what’s happening to the insurance companies. The people who think are no longer in control; they want it where a monkey can run it. It’s supposedly objective rather than subjective, but it’s not. It’s a faulty set of logic, and they’re going to get their butts sued.

I predict the implosion of the FICO score eventually. It’s one of the things that caused our last financial crisis. People with high FICO scores—no jobs, no assets, no nothing but a big FICO score—could go get a mortgage with nothing down. That got us into a mortgage mess.