Credit / Insurance Scoring

Insurance companies decide whether to insure a person and what they will pay for auto and homeowners insurance based on that person's risk of accidents and other losses. For many years insurers have used such factors as driving record, years of driving experience, age and condition of property to make these decisions. There is now an additional way of predicting risk—insurance scores based on credit information.

Also visit: Colorado's Credit Scoring Law | New Mexico's Personal Insurance Credit Information Act

Why Credit?

Studies by regulators, insurance companies, universities and independent auditors show that credit history is an indisputable and strong indicator of how likely someone is to file a future claim. For most insurance consumers this qualifies them for lower rates. Insurance companies report that on average two-thirds of their customers have lower premiums due to a good insurance score. If companies can't use insurance scores, the best risk customers end up paying more for the higher risk customers. For example, it would be comparable to ignoring the different risks represented by age and charging a 45-year old driver the same price as a 16-year old.

For example, in 2002 Maryland banned the use of credit in homeowners insurance and significantly restricted its use on auto policies. As a result, one company reported that rates for 59 percent of its policyholders rose by 14 percent.

The National Outlook on Credit & Insurance

In November 2002 the National Conference of Insurance Legislators (NCOIL) adopted a model act on credit scoring that protects consumers, addresses the needs of agents and preserves the benefits for consumers paying lower premiums when credit is used appropriately as an accurate underwriting tool. NCOIL reports that now 22 states have adopted laws that are either identical or similar to its model. Seven of the states, including Colorado, have newly adopted some version of NCOIL in 2004 alone.

Credit Reports, Credit Scores and Insurance Scores

Credit reports are not the same as credit scores. A credit report contains information that shows how quickly a debt is paid back. It also shows whether the person has had a bankruptcy or delinquent payments on a loan serious enough to trigger action by a debt collection agency.

Bankers and other lenders use credit reports to create a credit scoring system that helps them decide whether to offer consumers a loan. If the person has a good credit score, the chances are high that the loan will be paid back on time.

A few years ago, some insurance companies began to use insurance scoring as a way to help them underwrite. That tool helps them decide what insurance applications to accept or reject. Insurance scoring uses credit scores along with a number of other factors to determine what type of risk a person is.

Not all insurance companies use credit scoring, so you do have a competitive choice. However, take a moment first to understand credit scoring and make sure that it won't SAVE you money on your auto insurance.

Common Q&A On Credit Scoring

Q. Why do insurance companies use insurance scores?

A. Insurance companies need to be able to predict risk accurately so that what consumers pay for insurance reflects its cost. Studies have found a very strong link between insurance scores and the likelihood of auto insurance losses.

Insurance companies vary in their use of insurance scores. Some use them only when other factors suggest that the applicant is a poor risk—in insurance terms, a person who is likely to file more claims. Others use insurance scores extensively, both in underwriting and in setting rates. All companies must follow the Fair Credit Reporting Act and state laws that apply to the use of credit information. These measures ensure that there is confidentiality, accuracy and a legitimate need for the information sought.

Q. What advantages are there for consumers?

A. Most people have good credit histories so the use of insurance scoring may help them get insurance even if they have had to file claims for accidents, theft or other losses. For many people, the use of insurance scoring can mean lower rates.

Q. Why do agents need to know a person's social security number or other personal information?

A. Insurers use a person's social security number to be sure they're getting information that only applies to that individual. This way the insurance score reflects the person's true credit record.

Most insurance companies contract with specialized insurance scoring companies to obtain insurance scores. So generally, neither the insurance agent nor insurance company has access to specific credit information.

Insurance companies do not use personal information such as income, religion or race in underwriting, insurance scoring or setting insurance rates. None of these factors determine whether a person has a good or a bad credit history. People with low incomes may have insurance scores as good or better than people in higher income groups.

Q. What if there's been a mistake?

A. If a consumer is denied insurance because of information in their credit report, the insurance company is obliged to notify them. They have the right to dispute any information in their credit report. By law, the credit rating agency must provide them with a free copy of their credit report and must correct inaccurate or incomplete information at no charge to them.

Q. How can I get a copy of my credit report?

A. As of December 1, 2004, residents of Western states (Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, New Mexico, Nevada, Oregon, Utah, Washington and Wyoming) may order free copies of their credit reports from each of the three credit bureaus annually through AnnualCreditReport.com. Midwesterners will be able to order their free reports March 1, 2005, Southern state residents in June, and Eastern state and U.S. territory residents in September.

Q. How important is a good credit history?

A. There are many advantages to maintaining a good credit history—getting a better price on insurance is just one of them. In today's society good credit is more important than ever. A clean credit record will entitle a person to higher credit limits, lower interest rates on credit cards and more favorable interest rates on loans. Many landlords now perform credit checks before leasing an apartment and some employers investigate credit histories before making job offers. So whether buying a home, applying for a new job or looking for the best price on insurance, a good credit history will go a long way in helping a person realize their financial and personal goals.

Q. If a person has bad credit, is there anything they can do to lower their auto or homeowners insurance premium?

A. Insurance rates vary, depending on the insurance company, the coverage requested and whether the insurer uses insurance scoring (and to what extent). There are a number of things consumers can do to lower their insurance costs.

• Comparison Shop. Prices for the same coverage can vary by hundreds of dollars, so it pays to shop around.

• Ask for Higher Deductibles. Costs can be lowered substantially by requesting higher deductibles.

• Clean up Credit. For the long term, the consumer needs to establish a plan to pay all of their bills on time—and stick to it.

Most people develop credit problems simply because their spending consistently exceeds their income. Of course, credit problems can develop quickly following the loss of a job, after an extended illness or injury that reduces income, or the death of a spouse. A number of nonprofit organizations are dedicated to helping people manage their debts including the Consumer Credit Counseling Services and Myvesta US (formerly Debt Counselors of America).