Does My Credit Score Affect My Auto & Home Insurance Rate?

A growing number of personal auto and homeowners insurance companies now use consumer credit information to decide whether to issue or renew policies, or to decide what premiums to charge for those policies.

This fact sheet is designed to help you understand how your credit information is being used, and how it may affect your insurance purchases.

IS IT LEGAL FOR AN INSURANCE COMPANY TO USE 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.

WHY DO INSURANCE COMPANIES USE 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 MINORITIES OR LOW-INCOME CONSUMERS?

Insurers that use credit information 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.

As of October 1, 2003, Illinois law prohibits insurers from using a scoring model or other process using credit, on new or existing business, if such model or other process using credit contains any of the following factors: income, gender, address, ethnic group, religion, marital status, or nationality of the consumer.

WHAT KIND OF CREDIT INFORMATION ARE INSURANCE COMPANIES USING?

Although some insurance companies still look at your actual credit report, most companies now use a “credit score” or an “insurance score.” A 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 three-digit credit 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.

Following is a list of the more common credit factors used in determining credit scores:

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 to you.

For more information or a free auto / home insurance quote, contact: W.T. Flynn Insurance Agency, 40 Fenwood St. Framingham MA 01701, (508) 877-0078.