If you are shopping for auto or homeowner’s insurance, or if your current policy is up for renewal, your insurance company may be looking at your credit history.
It is not a secret that most insurance companies these days are checking consumers credit reports before they issue insurance for a car or home. Credit information is used for qualification purposes: based on your credit, an insurance company may decide whether to issue or renew the policy, and what premium to charge for the policy.
Here are some tips to help you understand how your credit may affect your insurance premiums.
Is it legal for an insurance company to look at my credit information without my permission?
Yes. A federal law, the Fair Credit Reporting Act (FCRA), states that insurance companies have “permissible purpose” to look at your credit information without your permission. However insurance companies must also comply with state insurance
laws when using credit information in the underwriting process.
Make sure to check your credit on a regular basis: once or twice a year is a must.
Why do some insurance companies use credit information?
Insurance companies believe there is a direct relationship between financial stability and losses. Consumers with good or excellent credit show more financial responsibility and tend to have fewer costly losses. Insurance companies feel that those consumers should pay less for their insurance.
Consumers with poor credit or no credit who show less financial responsibility, or no evidence of how responsible they are (no credit) tend to have more losses and, therefore, should pay more for their insurance.
Keep your credit report in good shape. If you don’t have an established credit history, start building one today.
Does using credit information discriminate against lower-income consumers?
Insurance companies use credit scoring models specifically developed for insurance industry. The developers of the scoring models state that income level factor has not been built into the model. There are just as many financially responsible people among low-income consumers as there are financially responsible high-income consumers.
In addition developers of the scoring model state that income, gender, marital status, religion, nationality, age, and location of property are not used in the credit scoring models.
Income level does not impact the insurance company’s decision, having good credit and showing financial responsibility does.
What kind of credit information do insurance companies use?
Most insurance companies that use credit information are using a “credit score.” Credit score models use several factors to calculate credit scores. Each factor is assigned a number, when applied to your specific credit information. By adding this numbers your credit score is calculated. Generally, the higher the number, the more financially responsible the consumer is.
Most common factors used to calculate the score are: negative accounts (bankruptcy, collections, foreclosures, liens, charge-offs, etc.), past payment history (number late payments and frequency), length of credit history, inquiries for credit, number of credit lines open, type of credit in use (major credit cards, store credit cards, loans etc.), outstanding debt.
Use your credit cards responsibly. Pay your bills on time.
How are insurance companies using credit?
Companies are using credit in two ways: underwriting – deciding whether to issue you a new policy or to renew your existing policy and rating – deciding what price to charge you for your insurance.
It is good to know that some state laws prohibit insurance companies from refusing to issue you a new policy or from refusing you a renewal on an existing policy based strictly on the information obtained from your credit report.
However, in states where it is permitted by law, insurance companies may use credit alone to determine your rate.
Get familiar with your local state laws regulating insurance businesses. Find a local certified credit consultant or get a consultation over the phone on how to improve your credit rating.
Will having no credit history affect my insurance purchase?
It may. If an insurance company cannot find a meaningful credit history for you, you will most likely end up paying a higher rate for insurance, if such a rate increase is permitted by state law.
Whether you are young and have no establish credit history, or don’t believe in using credit and always pay cash, whatever the reason might be, a lack of credit can result in a higher insurance payment.
What do insurance companies consider a good credit score?
A “good” score varies among companies. A good score is a number that matches the level of risk your insurance company is willing to accept for a particular premium. For some insurance companies, a 750 score may good enough and you will get the best (lowest) rate.
For other insurance companies, the same 750 score may not be high enough.
Don’t focus on the score. Focus on maintaining good credit by paying your bills on time and using the credit available to you mindfully.
How can I improve my credit score if I have been adversely affected?
Contact your insurance agent and find out what factors caused your credit score to be decreased. The agent or insurance company should be able to tell you the main factors which have adversely affected your score.
If the reasons you were given do not sound accurate, order a free annual credit report and make sure that you are not a victim of identity theft.
Once you have obtained a copy of your credit report, look for information such as late payments, amounts owed, new credit applications, types of credit, collections, charge-offs, and negative items such as bankruptcies, liens, and judgments.
Even if you desperately need insurance, don’t try to fix your credit overnight. It will not happen and you may end up stressed and frustrated. Rather, create a step- by step plan of how to improve your credit score and start implementing it immediately. If you are not sure how to create a plan and which factors are hurting your credit the most, go to www.CreditFirm.net, sign up for a free consultation, and get your custom Action Plan from a Professional Credit Consultant.
Apply for auto or homeowner’s insurance and chances are you’ll find an inquiry on your credit report from the insurance company. Why and how do insurance companies use your credit information? Lamont Boyd, FICO’s director of global scoring solutions for the insurance market, joined me for an interview on Talk Credit Radio to explain how credit information — specifically in FICO’s case, the “credit-based insurance scores” they power — are used by insurers. Following are five “myths” he dispels about how your credit affects the insurance you get.
Myth #1: Your agent will look at your credit report.
In years past, insurance companies may have looked at your credit reports, says Boyd. But “about 18 years ago when FICO created the first credit-based insurance scores, insurance companies from that point forward just began to use credit-based insurance scores. It’s very, very rare that an insurance company is actually looking at anybody’s credit report itself.”
Myth #2: Your scores are the same for insurance and credit purposes.
While similar types of information go into credit scores and credit-based insurance scores, there are some differences. Boyd explains:
“When (FICO) developed our credit risks scores, we’re trying to find from credit information whether or not the way this person has met their credit responsibilities in the past will more likely lead to default or serious delinquency than somebody else. But that’s not what we’re looking for with credit-based insurance scores. So, the models are really focused on the types of information that come from a credit report that are more indicative of future losses. Is this person — from the way they’ve managed their credit in the past — more or less likely to have an automobile or homeowner’s insurance loss?”
That said, however, Boyd says the same types of factors that impact your credit scores can hurt these scores as well; namely, paying bills late, maxing out credit cards or credit lines, or having a short credit history.
“Statistically what we’ve found over many years as a result of independent studies is that people who choose to manage their credit responsibilities very effectively also happen to be the same group of people who manage their risk responsibilities well,” he maintains.
Myth #3: Your claims history affects your credit-based insurance scores.
While an insurance company will look at your previous claims history, FICO doesn’t include that kind of information when calculating these scores. “Our models are specifically based on credit-based insurance information, more specifically, how does this person manage their credit responsibilities?” says Boyd.
Myth #4: Bad credit will get you turned down for insurance.
“In no state in the nation is an insurance company allowed to use credit information as a sole purpose for denying anybody insurance,” Boyd insists. “The use of credit really is to properly segment those risks so they can give them the greatest discount that might be available.”
Myth #5: If you’ve taken a hit financially in the past few years, you’re out of luck.
In addition to the fact that you can’t be turned down for insurance solely because of poor credit, you may also be protected in another way. According to Boyd, the majority of states have implemented provisions of the NCOIL model law (NCOIL stands for National Conference of Insurance Legislators). Under those provisions, somebody who has gone through certain “extraordinary life circumstances” such as a catastrophic event (think hurricanes, tornadoes or flooding); divorce; death of a parent, spouse or child; temporary loss of employment (involuntarily) for three months or more; or identity theft, among others, “has the opportunity to go to their insurance company and offer that information so that the insurance company then can exclude their consideration of credit from their overall underwriting and pricing of that risk.” He says, “That can benefit the consumer who has been negatively impacted by that extraordinary life circumstance.”
Finally, credit-based insurance scores are most heavily weighted toward more recent credit information, says Boyd. So pay down debt, if you can, be sure to make all your payments on time going forward and avoid applying for new credit unless you really need it. “By focusing on those three things, your credit-based insurance score should in fact increase over a period of time,” he says.