Have you ever applied for a loan or a credit card? Rented an apartment or obtained utility service?

If so, you know your credit history is very important.  The information contained in your credit report can have a major influence over many parts of your life, including your auto and homeowners insurance.  Read the following FAQ’s about insurance scoring, including how and why it’s used.

What is a credit-based insurance score? Why do insurance companies use them?

A credit-based insurance score uses information from your credit report to help predict how often you are likely to file claims, and/or how expensive those claims will be.  Studies by federal and state regulators, universities, independent auditors and insurance companies have proven that credit characteristics are predictive of certain outcomes, such as insurance loss.  The way you handle your credit says a lot about how responsible you are.  Insurance companies want to reward responsible people by making sure you don’t pay more than you should. 

Insurance score is not the same thing as a credit score.  Both are derived from data found in your credit report, but they predict different things.  A credit score predicts how likely you are to repay a loan or other credit obligation.  When you are applying for a loan for example, the bank will consider your credit history as well as other factors, such as income—which insurers do not consider—in determining whether you are likely to repay your debt.

What does my credit history have to do with how I drive my car?

Research has shown that consumers with better insurance scores generally file fewer claims and have lower insurance losses. That is not to say that all people with low insurance scores are higher risk.

For instance, if you add a 17-year-old driver to your auto policy, your premiums will likely increase.  This is because, as a group, younger drivers have more claims and losses than those with more experience.  That does not mean that all 17-year-olds are bad drivers; but research shows that drivers in that age group are more likely to have losses, so they pay more in premiums.  It’s the same with insurance scores—research shows that people with certain patterns of behavior in their credit history are more likely to result in losses for the insurance company.  As a result, they may pay higher premiums, or, in extreme cases, they might have trouble getting insurance from some companies. 

What kinds of things affect my insurance score?

• Payment history
• Bankruptcies
• Collections
• Outstanding debt
• Length of credit history

Any time someone looks at your credit report, the credit bureaus record this activity as an “inquiry.” The number of inquiries on your record can also affect your insurance score.  There are several types of inquiries; but under the models used by most insurance companies, the only inquiries that affect your insurance score are those you initiate when seeking new credit products.

Do credit-based insurance scores discriminate against certain ethnic or income groups?

No.  Insurance companies do NOT consider the following information in the calculation of your credit-based insurance score:

• Income
• Ethnic group
• Religion
• Gender
• Nationality
• Disability
• Public assistance sources of income

Can my insurance score help me save money on insurance?

Yes.  Credit-based insurance scores allow companies to charge lower premiums to customers who are better risks.  For example, people with better insurance scores and a good driving record could qualify for a better auto insurance rate.

Do I have rights if I’m denied insurance based on my credit history?

Yes.  If an insurance company takes an “adverse action” against you (such as denying you coverage) as the result of information contained in your credit report, you may obtain a copy of your credit report free of charge from the credit bureau that provided the information.  If you believe there are errors in the report, you should immediately notify the credit bureau—they must promptly correct errors.

Can I get a copy of my credit report before I apply for insurance?

Since December 1st, 2004, consumers have been entitled to one free credit report a year. At other times, for a small fee, each of the three major credit reporting bureaus will send you an updated copy of your credit report. 

For a copy of your report:

Equifax (www.equifax.com): 1-800-685-1111

Experian (www.experian.com): 1-888-397-3742

TransUnion (www.transunion.com): 1-800-888-4213

Information from the American Insurance Association