Jane Dotson
Credit scores are used by insurance companies to determine an individual's insurance credit score, which can impact the premiums they pay for insurance. While a soft pull of one's credit score by an insurance company does not change or ding one's credit score, a low credit score can lead to higher insurance premiums. This is because insurers consider individuals with low credit scores to be riskier candidates for their insurance policies. While a few states prohibit the use of consumer credit information for insurance rates, most states allow insurance companies to check credit scores to determine insurance rates.
| Characteristics | Values |
|---|---|
| Does credit score impact insurance options? | Yes, it could. |
| How does it impact insurance options? | Insurance companies use a credit-based insurance score, calculated using information from your credit report, to determine insurance rates. |
| How does credit-based insurance scoring work? | Policyholders with good credit-based insurance scores generally file fewer or less expensive claims. |
| Does insurance credit call affect credit score? | No, when insurance companies request your credit-based insurance score, it does not change or "ding" your credit score. |
| How to find out what your credit score is and how your insurer is using it? | Consumers can get one free credit report annually from each of the three major consumer reporting companies: Equifax, Experian, and Transunion. |
| How to improve credit score? | Consumers can improve their credit scores with careful spending. |
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What You'll Learn
Credit scores and insurance premiums
Credit scores are used by insurance companies to determine insurance premiums. This practice, known as credit-based insurance scoring, involves using an individual's credit history to assess the risk of providing them with insurance. While it is not permitted in all states, the majority allow it to some degree.
In states where it is permitted, insurers use credit-based insurance scores as one of several factors in their underwriting process. This means that a person's credit score can influence the cost of their insurance premiums, with those with higher scores often receiving lower premiums. Notably, credit-based insurance scores are not the same as standard credit scores, and insurers may use different scoring systems.
When calculating credit-based insurance scores, companies typically consider five key areas:
- Payment history: This includes how well an individual has made payments on their outstanding debt in the past.
- Outstanding debt: The amount of debt an individual currently has.
- Credit history length: How long an individual has had access to credit.
- Pursuit of new credit: Whether an individual has recently applied for new lines of credit.
- Credit mix: The types of credit an individual has, such as credit cards, mortgages, or loans.
It is important to note that insurers are not allowed to use credit-based insurance scores as the sole factor in determining premiums. Other factors, such as age, location, and vehicle type, are also considered when calculating insurance premiums. Additionally, certain states have placed restrictions on the use of credit information by insurers. For example, California, Massachusetts, and Hawaii prohibit the use of credit scores for auto insurance, while Maryland and Hawaii have similar restrictions for homeowners insurance.
To protect their interests, consumers should review their credit reports regularly and request corrections for any errors or missing information. They can also ask insurers about the specific credit-based insurance score used and how it affects their premium. By understanding how credit scores influence insurance premiums, individuals can make more informed decisions and potentially reduce their insurance costs.
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Credit-based insurance scores
A credit-based insurance score is a rating based on a consumer's credit information and certain elements of their credit history. According to FICO, a data and analytics company that measures credit risk, approximately 95% of auto insurers and 85% of homeowners' insurers use credit-based insurance scores in states where it is legally allowed.
- Payment history (40%) — How well a consumer has made payments on their outstanding debt in the past.
- Outstanding debt (30%) — How much debt a consumer currently has.
- Credit history length (15%) — How long a consumer has had a line of credit.
- Pursuit of new credit (10%) — Whether a consumer has applied for new lines of credit recently.
- Credit mix (5%) — The types of credit a consumer has (e.g. credit card, mortgage, auto loans).
It is important to note that credit-based insurance scores cannot use any personal information to determine a consumer's score. Consumers can obtain a free credit report annually to check for any errors, as these could affect their insurance score.
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Credit report errors
If you find errors in your credit report, you have the right to dispute them. Disputing errors generally involves contacting both the credit reporting company (Experian, Equifax, and/or TransUnion) and the company that provided the information (the "furnisher"). You should explain in writing what you believe is incorrect or missing, providing supporting documents if possible. You can use the sample dispute letters provided by the credit bureaus and furnishers as a guide. Disputes can be sent to the furnisher's address on your consumer report or to an address specified by the furnisher for credit reporting disputes. Furnishers are typically required to investigate and respond to disputes within 30 days of receiving them. If the investigation reveals that the information provided was incorrect or cannot be verified, the furnisher must update or remove it and notify all relevant credit reporting companies.
It is important to note that credit reporting companies are not obligated to investigate disputes that they deem frivolous or irrelevant. Therefore, it is crucial to provide sufficient information and supporting documentation when disputing errors. Additionally, if you suspect that the errors on your credit report are a result of identity theft, you can visit IdentityTheft.gov for assistance in reporting and recovering from identity theft.
To prevent credit report errors from affecting your insurance credit score, it is essential to be proactive in checking your credit report and disputing any inaccuracies or missing information. By regularly reviewing your credit report and taking prompt action to correct errors, you can help ensure that your credit history accurately reflects your financial standing and does not negatively impact your insurance options or premiums.
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Adverse action notices
In the context of insurance, an adverse action notice is required when an insurance company denies coverage or charges a higher premium than a consumer with an average insurance credit score. This notice must be provided to the consumer and can be delivered orally, in writing, or electronically. It should include the insurance credit score used in the premium calculation, the percentile of that score among all consumers, and the score needed to get a better premium.
- The name, address, and phone number of the consumer reporting agency (CRA) that supplied the report, including a toll-free number for nationwide CRAs
- A statement that the CRA did not make the adverse decision and cannot explain why the decision was made
- Notice of the consumer's right to a free copy of their report from the CRA if requested within 60 days
- Notice of the consumer's right to dispute the accuracy or completeness of any information provided by the CRA
It is important to note that adverse action notices are not required for business transactions under the FCRA. Consumers who receive an adverse action notice have the right to a free credit report from the credit bureau used by their insurance company. This allows consumers to identify any errors or missing information that may have contributed to the adverse action.
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Credit score factors
Credit scores are calculated based on a few factors, and understanding these factors can help you build and maintain a good credit score.
Firstly, payment history is the most important factor, accounting for 35% of your FICO score. Lenders want to know if you've paid past credit accounts on time, as this helps them figure out the risk involved in extending credit. Even one late payment can significantly harm your score, and the impact becomes more severe the further you fall behind.
The second most important factor is the amount owed, which makes up 30% of your FICO score. This considers the ratio of your debt to your credit limit, also known as the credit utilization rate (CUR). It is the percentage of your borrowing limit that you're using. Generally, a CUR below 30% is advisable, and those with the highest credit scores tend to have ratios below 10%.
The length of your credit history is also a factor, accounting for 15% of your FICO score. A longer credit history is generally positive, but it is not required for a good credit score. The age of your oldest and newest accounts and the average age of all your accounts are considered.
New credit applications can also impact your score. This factor includes how often you apply for new credit and accounts for 10% of your FICO score. Applying for several credit accounts in a short period can represent a greater risk, especially if you don't have a long credit history.
Lastly, your credit mix, or the types of credit you have, makes up the final 10% of your FICO score. This includes credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. It's generally best to apply for new credit only when you need it and to focus on managing your existing accounts responsibly.
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Frequently asked questions
It could. Insurance companies don't use credit scores directly but use a credit-based insurance score, which is calculated using information from your credit report. This means that a lower credit score could lead to a higher premium or rate.
Federal law requires the credit bureaus (Experian, Equifax and Transunion) to each provide you with one free credit report a year. You can request your credit reports and review them carefully to ensure accuracy.
Credit report errors are common and can be hard to correct. If you receive an adverse action notice, you have the right to a free credit report from the credit bureau used by your insurance company. You should then ask the insurer what insurance credit score was used in the premium calculation.
