Claims

In recent years, most insurers have begun using information from personal credit histories to decide whether to issue you automobile and homeowners insurance and how much to charge. "Credit scoring" condenses large volumes of consumer credit information into a single score. Consumers with too low a score may face high premiums or be denied coverage altogether. Those whose credit histories are too limited also are subject to higher insurance costs, depending on the insurer.

Scores used in insurance underwriting and rating usually differ from credit scores used to assess lending risk. Insurance scores are not designed to predict the likelihood of default or measure credit worthiness. Instead, they are to predict the likelihood that an individual will file an insurance claim. One could have a good credit score for lending, but a poor insurance score. In fact, instances exist in which applicants have been approved for home loans, but rejected for insurance on that home.

Two of the largest suppliers of scores to insurers are Fair, Isaac and Co. (FICO) and ChoicePoint. In addition, many of the larger insurers have developed their own in-house scoring methods. Sometimes, these credit scores are combined with other factors to produce an "insurance score" or "risk assessment factor." At other times, credit scores may account for all or most of a company's decision on pricing.

(Missouri advises auto insurers not to file guidelines that allow for rejecting coverage solely on credit scores. Find out how the top 10 auto insurers and top 10 homeowners insurers use credit information, go here.)

These questions and answers are designed to help consumers understand how their credit information is used by insurers and to alert individuals adversely affected by credit history use about possible remedies.

What is a credit score?
Recently, many insurers have adopted computer scoring methods that produce a "snapshot" of your credit information. The information from your credit report is entered into a mathematical formula (credit scoring model) that assigns weights to the transactions and events and then summarizes your credit information into a three-digit number. Generally, a higher number translates into lower insurance premiums. This score is often referred to as an "insurance score," to distinguish it from similar scores used for lending purposes, or as a "risk assessment factor."
Yes. The federal Fair Credit Reporting Act gives insurers access to your credit information without your permission. However, insurers are required to inform you if the use of such credit information results in an "adverse action."
Why are insurers using credit information?
Many insurance companies believe that information contained in credit reports will identify most individuals who are more likely to file an automobile or homeowners claim. Companies traditionally used claims or driving history to make these judgments; in auto policies, age, sex and marital status also were commonly taken into account.
What accounts for a lower credit score?
Different insurers use different items in different ways. In addition to late or delinquent payments, outright loan defaults or bankruptcies, any of the following items may count against you when you apply for insurance:
  • Maintaining credit card balances at or near your credit limit.
  • Opening too many credit accounts, including bank loans, credit cards, or department store accounts, whether or not you actually use this credit. Because you have the capacity to make charges, that may decrease your score.
  • Having too few accounts with low credit limits.
  • Having too many credit "inquiries" on your record. An inquiry is usually generated any time you apply for credit, and may also occur as a result of renting a new apartment, opening certain bank accounts, or any other activities in which a third-party examines your credit history. Other marketing/ prescreening, account review, and insurance inquiries may not have an impact.
  • In many instances, having no credit history will results in higher rates. In Missouri, so-called "slim" credit histories have a disproportionate impact on such identifiable groups as seniors, farmers, Hispanics and Muslims.
  • Insurers and credit-scoring suppliers have no responsibility to take into account catastrophic events that may damage your credit score directly or indirectly. For example, if you are injured or seriously ill and hospitalized -- and unable to pay the bills on time -- your credit score will go down. If your company closes and you lose your job -- and bills are paid late -- your score will reflect that problem.
Because different insurers evaluate credit histories differently, consumers should ask their agent about how their credit history may impact their rates and / or eligibility for coverage. Remember, however, that your agent may not have more specific information and may not be able to obtain it from the company.

Companies also may use more than your credit history to adjust your rates or deny coverage. They may order evaluations of other persons living at the same address even if they are not listed on the policy. (Insurers similarly may consider unnamed persons' driving records at the same address, or claims filed by persons on the same vehicle, even if they no longer own the car.) If you purchased an item or property with a former spouse and that person defaults or pays late -- even if the property and debt responsibilities have been reassigned by court order -- your credit history and score likely will suffer.

Many states, including Missouri, are considering legislation to increase consumer protections against abuses in the credit scoring system
How do I know if an insurance company is checking my credit records?
Some agents and companies will ask for your social security number to obtain "consumer information," "background information," or an "insurance/credit score."

Asking the agent is your only means to determine if the company will look at your credit information or whether credit is the sole factor they will consider when accepting or rating you. Some companies will allow you the option of barring them from using credit scores in your evaluation, but be prepared to pay a higher premium anyway.

If you would like to know whether your credit information is affecting your current policy or rates, ask your insurance agent or company. A credit score may also account for a company's decision to offer you a renewed policy, but in an affiliated firm that may have higher or lower rates.
Must an agent or company tell me what my credit score is?
No. In fact, the agent or company underwriter might not even know your actual credit score. Instead, the credit scoring company or model they use may just advise that your score qualifies you for a particular tier or company within the group.
If I don't know my score, and my score varies from company to company, how will I know if my credit affects my insurance purchases?
The federal Fair Credit Reporting Act (FCRA) requires an insurance company to tell you if they have taken an "adverse action" against you because of information contained in your credit report — either raising your rates or deny coverage. If a company tells you that you have been adversely affected, they must also tell you the name of the national credit bureau that supplied the information and contact information so that you can get a free copy of your credit report.
The best way to know for sure if your credit score your acceptance or pricing with an insurer is to ask. Many companies do not follow FCRA requirements on notifying policyholders about adverse actions, although practices appear to be improving.
How can I improve my credit score if I have been adversely affected?
Find out what factors contributed to a low score. Your agent or company should be able to tell you the most significant factors, which are usually supplied by the vendors of credit scores to insurers. Do not expect specific answers about how to improve your score, even if the scoring company offers to sell you that advice. The value of a credit score would drop if consumers knew how to manipulate the results.
What can I do if my credit report contains inaccurate or incomplete information?
If your insurance company has taken an "adverse action" because of your credit, you are entitled to a free copy of your credit report from the credit reporting bureau they used. However, because the three national credit reporting bureaus do not share information with each other, it is a good idea to obtain a copy of your credit report from each of them because each report may contain the same or different errors and correcting them in one report may not fix the errors in the others.   You may have to pay a fee of about $10 for each report.  
The three largest credit bureaus are:
Equifax
P.O. Box 105873
Atlanta, GA. 30348
(800) 685-1111 or (770) 612-3200
For Georgia, Vermont or Massachusetts (800) 548-4548
For Maryland, (800) 233-7654
Web site address: www.equifax.com

Experian (formerly TRW)
P.O. Box 2104
Allen, Texas 75013-2104
(888) 397-3742
Web site address: www.experian.com

Trans Union Corporation
Consumer Disclosure Center
P.O. Box 390
Springfield, PA. 19064-0390
(800) 916-8800
Web site address: www.transunion.com

If you find errors in your credit report, advise the credit bureau. In addition, you should immediately notify your insurance agent and company and ask if these errors will make a difference in your insurance purchase. Don't wait until the matter is resolved by the credit bureau. You often do not have time to wait because a nonrenewed policy is expiring or a company is considering your new application.

The credit bureau will contact the reporting entity (bank, credit card company, collection agency, etc) to verify the information. The bureau must investigate and respond to you within 30 days.

If the disputed information cannot be verified, or if the reporting entity agrees that the information is incorrect, the credit bureau must remove, complete, or update the information. Also at your request, the credit bureau must send a notice of the correction to any creditor that has checked your file in the past six months.

If the reporting entity verifies that the information is indeed correct, the credit bureau will not remove the information from you credit report. However, the FCRA permits you to file a 100-word statement explaining your side of the story, and the reporting bureau must include your statement with your credit information each time it's sent out. Make sure your insurance company has a copy of your statement, and ask if they will take it into account.

Once the errors are removed or corrected, it's a good idea to obtain a new copy of your credit report several months later to make sure the incorrect or erroneous information hasn't been reported again.

Under federal and state law, however, insurers do not have a responsibility to recalculate your credit score if the report has been changed. They are not required to use new credit information each year when the policy is due for renewal. If you know your credit score likely improved, you have nothing to lose — and everything to gain — by asking for a recalculation or use of new information.The Federal Trade Commission (FTC) maintains a wealth of credit related information on their web site. For more detailed information about how to dispute credit information, see the Federal Trade Commission's (FTC) web site.