A growing number of personal auto and homeowners insurance companies have begun looking at 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 being used for personal auto and homeowners insurance, and how it may affect your insurance purchases.



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 a "permissible purpose" to look at your credit information without your permission. Insurance companies must also comply with state insurance laws when using credit information in the underwriting and rating process.

Why are some insurance companies using credit information?

Some insurance companies believe there is a direct statistical relationship between financial stability and losses. They believe that as a group, consumers who show more financial responsibility have fewer and less costly losses, and therefore, should pay less for their insurance. Conversely, they believe that as a group, consumers who show less financial responsibility have more and costlier losses, and therefore, should pay more for their insurance.

Does using credit information discriminate against lower-income consumers?

Insurers that use credit and entities that have developed credit scoring models state that there is no difference in credit scores among different income levels because there are just as many financially responsible low-income consumers as there are financially responsible high-income consumers. In addition, those companies warrant that factors such as income, gender, marital status, religion, nationality, age, and location of property are not used in their credit scoring models. At the same time, these entities have not addressed factors that may appear neutral on their face but have a disparate impact on protected categories of consumers. For example, some scoring systems consider the source of credit that a consumer uses and consumers who rely on finance companies and other subprime lenders may receive lower credit scores. This may have a disproportionate impact on minorities.

What kind of credit information are insurance companies using?

Although some insurance companies still look at your actual credit report, most companies that use credit information are using a "credit score." A credit score is a snapshot of your credit at one point in time. Insurance companies and entities that have developed credit scoring models use several factors to determine credit scores. Each factor is assigned a weighted number that, when applied to your specific credit information and added together, equals your final three-digit score ranging from 0-999, depending on the insurance company and the credit scoring model used. Generally, the higher the number, the more financially responsible the consumer is. Following is a list of the more common factors used:

- Major negative items bankruptcy, collections, foreclosures, liens, charge-offs, etc.

- Past payment history number and frequency of late payments; days elapsed between due date and late payment date.

- Length of credit history amount of time you've been in the credit system.

- Home ownership whether you own or rent.

- Inquiries for credit number of times you've recently applied for new accounts, including mortgage loans, utility accounts, credit card accounts, etc.

- Number of credit lines open number of major credit cards, department store credit cards, etc. that you've actually opened.

- Type of credit in use major credit cards, store credit cards, finance company loans, etc.

- Outstanding debt how much you owe compared to how much credit is available

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. Some state laws prohibit insurers from refusing to issue you a new policy or from non-renewing your existing policy based solely on information obtained from your credit report. In addition, some state laws prohibit insurance companies from using your credit information as the sole factor in accepting you and placing you into a specific company within their group of companies.

Rating - deciding what price to charge you for your insurance, either by placing you into a specific rating "tier" or level, or by placing you into 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 permitted by state law, some insurers may use credit alone to determine your rate.

How do I know if an insurance company is looking at my credit?

Some agents and companies will ask for your social security to obtain "consumer information," "background information," or an "insurance bureau/credit score." When an application for insurance is submitted, consumers should ask their insurance agent or company about whether and how credit information will be used in the underwriting and rating process.

Will having no credit history affect my insurance purchase?

Sometimes an insurer will find "no hits," or "no score," which means they cannot find a meaningful credit history for you. This lack of credit information could occur: if you're young and haven't yet established a credit history; if you don't believe in using credit and have always paid in cash; or if you have recently become widowed or single and all of your previous credit information was in your spouse's name. If an insurance company finds no meaningful credit information for you, you may pay a higher rate for insurance, if such rate increase is permitted by state law. Although many companies won't charge you their highest rate, neither will they give you their best rate. If you know that you have an established credit history, check with your agent or insurance company to make sure they are using your correct social security number, birth date, or other information to find your records.

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 one company, a 750 score 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.

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. However, even if you know your credit score, it may not be useful to you. Since a score is just a snapshot of your credit information on a particular day, your score could change at any time there is a change in your credit activity or a creditor's report to a credit bureau. In addition, insurance companies use different credit scoring models, so your score could vary from one insurer to another. For example, one company may use three scoring factors (bankruptcies, judgments, and liens) and assign certain weights/points to each. Another company may use those same three factors, but assign them different weights/points, and use two additional factors such as payment history and outstanding debt. Lastly, since the national credit bureaus don't share information with one another, a score may change depending on which of the three national credit bureaus report the information that goes into the scoring model.