Posted On: November 29, 2006, 12:00 pm CST

Posted By: Ratemaker

The score used by insurers to measure insurance risk is not the same score used by the banks to measure risk of default. Certain values that the bank can use (income, bank balances) cannot be used by the insurer in calculating a score.

In Dave Ramsey's case, Most insurance credit score models would return a "thin file" indicator, showing that there is not enough information to return a score. Insurer handling of thin files varies from company to company. I think most companies currently treat thin files about the same as above average scores.

As for your second example, the person who makes their payments on time but is carrying max balances on everything, that person is likely to have an average to below average score, as insurer credit scores usually use balance-to-limit ratios as an input.

As for the scores being right on average, but a false indicator for many individuals, I have two responses:
1) Many insurers are working on more stable, more accurate credit score models. As the modeling expertise increases, the overall accuracy should increase as well.
2) Insurance is rated on the aggregate, not the individual. Even as simple and widely accepted a rate factor as driver age can be a false indicator for some individuals. I've met 17-year-olds that are the safest drivers you'll ever find, but the class of 17-year-old drivers has terrible loss experience as a whole, so they pay more as a group. Those with poor credit scores have terrible loss experience as a whole, so they pay more as a group as well.