Insurance companies may look at your credit history when you apply for new auto or homeowners insurance. Here is some valuable information that may help you understand how insurance companies use your credit history.
What is an insurance credit score?
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.
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.
- Homeownership– whether a consumer owns or rents property.
- Inquiries for credit– number of times a consumer recently has applied for new accounts, including 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.
- Outstanding debt – how much a consumer owes compared to how much credit is available.
How is an insurance credit score used?
If your insurance company relies on credit scoring, it might use your credit score to underwrite and/or rate your policy.
- Underwriting is the process of deciding whether to issue you a new policy or to renew an existing policy.
- Rating 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 include:
- Auto Insurance – driving record, type of car you own, where you live.
- Homeowners Insurance – 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 permission.
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 adverse action is taken because of their credit information. FCRA defines adverse action 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 adverse action 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 adverse action include:
- 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 surcharge.
Dispute Resolution Rights
- Insurers utilizing credit scoring in the rating or underwriting of personal lines products shall establish dispute resolution procedures and ensure proper personnel have been assigned to make decisions concerning these disputes. These procedures shall be filed with the Department and included in the submission of any insurance scoring models, rates or rules based on consumer credit information, or underwriting rules or guidelines based on consumer credit information. Any subsequent change to the dispute resolution process must also be filed. Once the dispute resolution procedures have been approved or acknowledged, future filing submissions that do not include a change to the dispute resolution should certify that no changes have been made to the process. This certification should include the filing designation, filing date and disposition date. The submission of the dispute resolution procedures should address each of the items listed in Section B. below. These procedures are in addition to all disclosure notice requirements in the Fair Credit Reporting Act, Chapter 39 of Title 33 of the Official Code of Georgia Annotated (O.C.G.A.), and Article 4 in Chapter 24 of Title 33.
- When an insurer has taken an adverse action based on credit information which triggers notification to the insured or applicant, they shall:
(1) Notify the insured or applicant of the Dispute Resolution procedures the insurer has in place to help expedite the appeals process found in the federal Fair Credit Reporting Act, 15 USC 1681m (a). The insurer must provide notification to the consumer explaining the reason or reasons for the adverse action. The reasons must be provided in clear and specific language so that a reasonable person can identify the basis of the decision. This notice shall comply with O.C.G.A. §33-24-94. The insurer shall have trained personnel able to identify problems, answer specific questions, and direct the consumer concerning negative items found in the credit report and/or reason codes.
(2) Make a credit report available for the insured or applicant’s review within 24 hours of the adverse action.
(3) Provide to the insured or applicant the contact information for the credit bureau(s) and instruct them on how to file a dispute under the Fair Credit Reporting Act. This is separate from the insurer’s dispute resolution procedures.
(4) Implement procedures to immediately give credit for any disputed items. This can be accomplished by either re-scoring after removing the disputed item(s) or provide a quote utilizing no credit. Identify which of these options will be used in the dispute resolution process. When the disputed item(s) is/are settled, then issue the policy according to the filed underwriting and/or rating plan. In instances where the insured/applicant completed the federal Fair Credit Reporting Act’s appeal process and the consumer and vendor or other furnishers of information are at an impasse as to the validity of the dispute, the insurer may either not utilize these items or not use credit in the underwriting and/or rating of the policy unless:
- The insurer can independently verify that the vendor’s or other furnishers of information position is correct; or
- Materials provided by the applicant or insured do not support their claim.
(5) Each insurer’s Dispute Resolution procedure shall include an appeal provision to evaluate life changing or unusual events. These types of events would include, but would not be limited to:
- Identity fraud;
- Deaths in the family where the surviving spouse may have a thin file due to the credit being in the other spouses name;
- Divorce situations in which the spouse can demonstrate derogatory items on the credit report are beyond their control; and/or
- Serious injury or illness.
C. Insurers shall be required to maintain a log of all disputes indicating the nature of the dispute and its final disposition. This log shall be available to the Department upon request.
How can I review my credit report?
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 are:
- Pay bills on time every month
- 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!
