A growing number of auto and home insurance companies have begun to look to consumer credit information to decide whether to issue or renew policies, or to decide what premiums to charge for those policies. This brochure is designed to help you understand, in general terms, how your credit information is used for personal home and auto insurance, and how it may affect your insurance purchases.
Is it legal for an insurance company to view my credit information without my permission?
Yes. A federal law, the Fair Credit Reporting Act (FCRA), states that insurance companies have a "permitted purpose" to view your credit information without your permission. Insurance companies must also comply with national insurance laws when using credit information in the underwriting and rating process.
Why do some insurance companies use credit information?
Some insurance companies believe that there is a direct statistical relationship between financial stability and losses. They believe that as a group, consumers who demonstrate greater financial responsibility experience fewer and less costly losses and, therefore, should pay less for their insurance. Conversely, they believe that as a group, consumers who demonstrate less financial responsibility have larger and more costly losses and, therefore, should pay more for their insurance.
Does the use of credit information discriminate against low-income consumers?
Credit-using insurers and entities that have developed credit-scoring models claim that there is no difference in credit scores between different income levels because there are so many consumers at financially responsible low-income consumers than financially responsible high-income consumers. Additionally, these companies ensure that factors such as income, gender, marital status, religion, nationality, age, and location of ownership are not used in their credit scoring models. . At the same time, these entities have not addressed factors that may seem neutral at first sight but have a disparate impact on the protected categories of consumers. For example, some scoring systems take into account the source of credit used by a consumer, and consumers who rely on finance companies and other subprime lenders may receive lower credit scores. This can have a disproportionate impact on minorities.
What type of credit information do insurance companies use?
Although 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 any given time. Insurance companies and entities that have developed credit score models use several factors to determine credit scores. Each factor is assigned a weighted number which, when applied to your specific credit information and added together, equals your final three-digit score ranging from 0 to 999, depending on the insurance company and scoring model. credit used. Generally, the higher the number, the more financially responsible the consumer is. Here is a list of the most commonly used factors:
- Bankruptcy of major negative items, recoveries, seizures, liens, write-offs, etc.
- Past payment history number and frequency of late payments; days elapsed between the due date and the late payment date.
- Length of credit history, how long you have been in the credit system.
- Home ownership whether you own or rent.
- Credit applications for the number of times you have recently applied for new accounts, including mortgages, utility accounts, credit card accounts, etc.
- Number of credit lines opened number of major credit cards, department store credit cards, etc. that you actually opened.
- Type of credit used: major credit cards, store credit cards, loans from finance companies, etc.
- Outstanding debt how much you owe versus how much credit is available
How do insurance companies use credit?
Businesses use credit in two ways:
Underwriting - deciding whether to issue you a new policy or renew your existing policy. Some state laws prohibit insurers from refusing to issue you a new policy or not renewing your existing policy based solely on information obtained from your credit report. Additionally, some state laws prohibit insurance companies from using your credit information as the sole factor in accepting and placing you with a specific company within their group of companies.
Rating - deciding how much to charge you for your insurance, either placing you in a specific "tier" or rating level, or placing you with a specific company within their group of companies. Some insurers use credit information along with other more traditional rating factors such as motor vehicle records and claims history. Where state law permits, some insurers may use credit alone to determine your rate.
How do I know if an insurance company is reviewing my credit?
Some agents and companies will ask for your social security for "consumer information", "general information", or "credit score/insurance bureau". When an application for insurance is submitted, consumers should ask their agent or insurance company if and how credit information will be used in the underwriting and underwriting process.
Will having no credit history affect my insurance purchase?
Sometimes an insurer will find "no results" or "no scores", which means they cannot find a meaningful credit history for you. This lack of credit information can occur: if you are young and have not yet established a credit history; if you don't believe in credit and have always paid in cash; or if you were recently widowed or single and all of your previous credit information was in your spouse's name. If an insurance company can't find any meaningful credit information for you, you can pay a higher insurance rate, if such a rate increase is allowed by state law. While many companies won't charge you their highest rate, they won't give you their best rate either. If you know you have an established credit history, check with your agent or insurance company to make sure they are using your social security number, date of birth, or other correct information to find your folders.
What do insurance companies consider a good credit rating?
A "good" score varies from company to company. A good score is a number that corresponds to the level of risk your insurance company is willing to accept for a particular premium. For a business, a score of 750 may qualify you for their best (lowest) rate. For another company, the same 750 may not be high enough to qualify you for their best (lowest) rate.
Should an agent or company tell me what my credit score is?
No. In fact, the company's agent or underwriter may not even know your actual credit score. Instead, the company or the credit scoring model it uses may simply indicate that your score qualifies you for a particular level or company within the group. However, even if you know your credit score, it may not be useful to you. Because a score is just a snapshot of your credit information on any given day, your score can change at any time if there is a change in your credit activity or a creditor's report to a reporting agency. credit assessment. Additionally, insurance companies use different credit score models, so your score may vary from insurer to insurer. For example, a company may use three rating factors (bankruptcies, judgments, and liens) and assign certain weights/points to each. Another company may use these same three factors, but give them different weights/scores and use two additional factors such as payment history and outstanding debt. Finally, because the national credit bureaus do not share information with each other, a score may change depending on which of the three national credit bureaus is reporting the information that goes into the scoring model.
