A Consumer's Credit
Score May Affect Auto and Homeowners Insurance Premiums
Insurance companies may look at
your credit history when you apply for new auto or homeowners insurance,
or if your current policy is up for renewal. Here is some valuable
information that may help you understand how insurance companies use
your credit history.
What is an insurance credit
A credit score is a snapshot of your credit at one point in time.
Insurance companies enter information from your credit history and your
insurance application into a credit-scoring computer model to calculate
a specific insurance credit score. Each factor chosen for the model is
assigned a weighted number. Your insurance credit score ranges from
0-999, with a higher number conveying a better score.
What kind of credit
information do insurers use?
Each insurer decides what information to use in its credit scoring
model. Insurance companies may weigh each factor differently. Some of
the more common credit factors used by insurers are:
Major negative items
– bankruptcy, collections, foreclosures and liens;
Past payment history
– number and frequency of late payments, and days between due date
and payment date;
Length of credit history
– amount of time a consumer has been in the credit system.
– whether a consumer owns or rents property.
Inquiries for credit
– number of times a consumer recently has applied for new accounts,
including mortgage loans, utility accounts and credit card accounts.
Number of open credit lines
– number of major credit cards and department store credit cards.
Type of credit in use
– major credit cards, store credit cards and finance company loans.
– how much a consumer owes compared to how much credit is available.
Some states have laws that limit what
credit information insurers may use and how they use that information.
For more information, contact your state insurance department.
How is an insurance credit
If your insurance company relies on credit scoring, it might use your
credit score to
rate your policy.
is the process of deciding whether to issue you a new policy or to
renew an existing policy.
is the process that determines how much you pay for insurance.
In addition to using credit information,
insurance companies will use other, more
traditional rating factors
to determine the premium you pay for your auto or homeowners insurance
policy. Some of these
traditional rating factors
– driving record, type of car you own, where you live.
– where you live, cost to replace
your home, claim history.
Is it legal for insurance
companies to use my credit information?
Yes. The Fair Credit Reporting Act (FCRA), a federal law, states that
insurance companies may look at your credit information without your
Will having no credit history
affect my insurance purchase?
It is possible. Depending on your credit history, an insurance company
may not find a meaningful credit history. In that case, some companies
will charge you more, while other companies will use the previously
mentioned “traditional factors.” If you are young and have yet to
establish a credit history, don’t believe in using credit, or recently
have become widowed or single and all previous credit was in your
spouse’s name, you may not have credit information. In these cases, your
insurance purchase may be affected.
How will I know if my credit
history has affected my insurance purchase?
The FCRA requires insurance companies to notify consumers if an
is taken because of their credit information. FCRA defines
to include denying or canceling coverage, increasing premiums, or
changing the terms, coverage, or amount of coverage in a way that harms
the consumer. If an insurer takes an
due to your credit history it also must notify you of the name of the
national credit bureau that supplied the information.
Examples of an
- Canceling, denying
or not renewing coverage;
- Giving the
consumer a limited coverage form;
- Limiting benefits,
such as eligibility for dividends;
- Issuing coverage
other than for what was applied;
- Not giving the
consumer the best rate;
- Not giving the
consumer the best discount;
- Adding a premium
How can I review my credit
Monitoring your credit report is important because many decisions now
are based on how your finances are managed. It is a good idea to obtain
a copy of your credit report once a year and review it for any errors.
Consumers now can receive one free copy of their credit report every 12
months from each of the three national credit bureaus. To receive your
free credit report, visit
www.annualcreditreport.com. Or contact
the three credit bureaus directly:
It is important to remember that your
credit report is not the same thing as your credit score. To obtain your
credit score, you will have to buy it from one of the credit bureaus.
However, it may not be the same credit score that the insurer used to
make its decision.
How can I improve my credit?
To improve your credit, it is helpful to review your credit report for
any false information and outdated items. Create a plan that will
improve your credit over time. Ideas to help improve your credit history
- Pay bills on time
- Pay at least the
minimum balance due
- If you can’t make
a payment, contact the creditor
- Work to reduce the
amount you owe, especially on revolving debt such as credit cards
- Limit the number
of new credit accounts
Your insurance agent or company should be
able to identify for you up to four factors that impact your insurance
credit score the most. It may take up to seven years for an accurate,
negative report to be removed from your credit report. You must notify
each of the credit bureaus of any errors you find on the report. The
credit bureaus do not share information. The Federal Trade Commission
has excellent information regarding a consumer’s rights and use of
credit. This information can be found at
www.ftc.gov or by calling 877-382-4357.
Important points to remember:
- There is a good
chance your current auto and/or homeowners insurance company, or a
prospective insurer, will review your credit history.
- Verify whether
your auto and/or homeowners insurance company uses credit scores,
and ask how that information impacts your insurance premium.
- Once a year,
obtain and review a copy of your credit report from each of the
three credit bureaus.
- Report any errors
to your insurer and each credit bureau.
- Work toward
improving your credit.