More and more auto and home insurance companies are looking at a customer's credit report to decide whether or not to give them a policy, whether or not to renew it, and how much to charge for it. This brochure is meant to help you understand, in general terms, how your credit information is used for personal auto and home insurance, and how that may affect the insurance you buy.
Is it legal for an insurance company to look at my credit report without my permission?
Yes. The Fair Credit Reporting Act (FCRA) says that insurance companies can look at your credit report without your permission if they have a "permissible purpose." When they use credit information in the underwriting and rating process, insurance companies must also follow state insurance laws.
Why do some insurance companies look at your credit?
Some insurance companies think that there is a direct statistical link between a company's financial stability and the number of claims it has to pay out. They think that, as a group, people who are more responsible with their money have fewer and less expensive losses, so they should pay less for their insurance. On the other hand, they think that consumers who are less responsible with their money have more and more expensive losses and should pay more for their insurance because of this.
Does using credit information unfairly treat people with less money?
Insurance companies that use credit scores and groups that have made credit scoring models say that credit scores don't change based on income level because there are just as many financially responsible people with low incomes as there are with high incomes. Also, these companies guarantee that their credit scoring models don't take into account things like income, gender, marital status, religion, nationality, age, and where a person lives. At the same time, these groups haven't done anything about things that may seem neutral at first glance but have different effects on protected groups of consumers. Some scoring systems, for example, look at where a person gets credit, so people who use finance companies and other subprime lenders may get lower scores. Minorities may be hurt by this more than others.
How do insurance companies find out about your credit?
Even though some insurance companies still look at your actual credit report, most companies that use credit information use a "credit score." A credit score is a snapshot of your credit at a certain point in time. Insurance companies and other groups that have made models for figuring out credit scores use a number of factors to do this. Each factor is given a weighted number that, when added to your specific credit information, gives you a three-digit score that can range from 0 to 999, depending on the insurance company and the credit scoring model used. In general, the higher the number, the better the consumer is with money. Here is a list of some of the most common ones:
- Bankruptcy, collections, foreclosures, liens, charge-offs, etc. are some of the worst things that can happen.
- The number and frequency of late payments in the past, as well as the number of days between the due date and the date of the late payment.
- The length of your credit history is how long you've had credit.
- Owning a home is important, whether you rent or own.
- The number of credit inquiries is how many times you've recently applied for new accounts, such as mortgage loans, utility accounts, credit card accounts, etc.
- How many credit lines you have open the number of major credit cards, department store credit cards, etc. that you've actually opened.
- Types of credit used: loans from finance companies, major credit cards, store credit cards, etc.
- Outstanding debt how much money you owe compared to how much money you can borrow
How are credit cards used by insurance companies?
Credit is used in two ways by companies:
Underwriting is the process of deciding whether to give you a new policy or renew the one you already have. Some state laws say that an insurance company can't refuse to give you a new policy or not renew your old one based solely on information from your credit report. Also, some state laws say that insurance companies can't use your credit score as the only reason to accept you and put you in a certain company within their group.
Rating is the process of deciding how much to charge you for your insurance. They do this by putting you in a certain "tier" or level of rating or by putting you in a certain company in their group of companies. Some insurers use information about your credit score along with more traditional rating factors like your car's history and the number of claims you have made. Some insurers may only look at your credit score if the state law lets them.
How do I know if my credit report is being looked at by an insurance company?
Some agents and companies will ask for your social security number to get "consumer information," "background information," or a "insurance bureau/credit score." When a person applies for insurance, they should ask their insurance agent or company if and how their credit history will be used in the underwriting and rating process.
Will the fact that I have no credit history affect my ability to buy insurance?
When an insurer finds "no hits" or "no score," it means they can't find any useful information about your credit history. This could happen if you're young and haven't built up a credit history yet, if you don't like using credit and have always paid cash, or if you just got divorced or became single and all of your previous credit information was in the name of your spouse. If an insurance company can't find any useful information about your credit, you may have to pay a higher rate for insurance if that's allowed by state law. Many businesses won't charge you their best rate, but they also won't charge you their highest rate. If you know you have a good credit history, check with your agent or insurance company to make sure they are using your correct social security number, birth date, or other information to find your records.
What does a good credit score mean to insurance companies?
What a company calls a "good" score varies. A good score is a number that matches the level of risk your insurance company is willing to take for a certain premium. For one company, you might get their best (lowest) rate if you have a score of 750. For another company, a score of 750 might not be enough to get their best (lowest) rate.
Should a company or agent tell me my credit score?
No. In fact, the agent or company underwriter might not even know your real credit score. Instead, the company or model they use to figure out your credit score may just tell them that your score puts you in a certain tier or company within the group. But even if you know what your credit score is, it might not help you. Since a credit score is just a snapshot of your credit information on one day, it can change whenever your credit activity changes or a creditor reports to a credit bureau. Also, different insurance companies use different ways to figure out your credit score, so it could be different from one insurer to the next. For instance, one company might use three scoring factors (bankruptcies, judgments, and liens) and give each one a certain number of points. Another company might use the same three factors, but give them different weights or points and add two more, such as the history of payments and the amount of debt that is still owed. Lastly, since the national credit bureaus don't share information with each other, a score can change depending on which of the three national credit bureaus reports the information that goes into the scoring model.
