Credit score and its use by the insurance industry is not well understood by consumers
Insurance and credit score are too things that often intermingle without much notice. Many insurance companies use credit score and other socio-economic information to price policies. This is somewhat common in some U.S. states, but it is also banned in much of the country due to the fickle nature of credit and the relatively loose understanding that consumers have regarding their own credit scores. Suze Orman, a prominent financial advisor, has been calling into question the validity of using credit score and how it is being used by insurance companies.
Many people lack awareness when it comes to their credit
According to Orman, credit scores can be a very problematic issue for many people in the U.S. Most people do not have a comprehensive understanding of how their credit score can affect their lives, while others do not know how to improve their score once it has been damaged. Insurance companies could potentially capitalize on this confusion and benefit by charging people more for coverage based solely on their credit rating. For those that fall victim to credit fraud, this practice could lead to further financial disaster. Many fraud victims are slow to receive the help they need simply because the process seems overwhelming to them or they have trouble finding the appropriate resources needed to combat potential identity theft.
Young adults fall into a dangerous trap of debt
Orman suggests that the younger generation is being encouraged to adopt a complacent mindset when it comes to credit score and the dangers that debt represents. At this year’s Money20/20 event, the financial adviser talked about how many young people are placing themselves in compromising financial situations through the flagrant use of credit cards. These consumers often seek out payday loans and similar financial services to offset their increasing credit card debt. While such financial services do help young adults manage their debt to some degree, their inability to handle the massive interest associated with payday loans could have a crippling impact on their credit scores, thereby spiking their insurance rates.
Education may help people better understand credit score and insurance issues
Orman notes that education is key to helping people understand credit score and its impact on their lives. Education can also help people understand whether or not their credit score will affect the cost of their insurance coverage. Insurers often suggest that credit score is a valuable way to identify the risk that consumers represent, but using this information has been banned in some parts of the U.S. because of the fact that many people do not understand the various aspects of credit information.