Questions and Answers About How Your Credit Affects Your Insurance Rates
A growing number of personal auto and homeowner's 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.
If you are shopping for auto or homeowner's insurance or if your current policy
is up for renewal, chances are the company may be looking at your credit
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 receive general credit
information without my permission?
Yes. A federal law, the Fair Credit Reporting Act (FCRA), states that insurance
companies have a "permissible purpose" to receive general credit information
that does not identify your relationship or experience with a particular
creditor without your permission. Insurance companies must also comply with
state insurance laws when using credit information in the underwriting and
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.
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," sometimes
called an "insurance score." A credit score is a snapshot of your credit at one
point in time. The credit information from your credit report is put through a
mathematical formula (credit scoring model) that assigns weights to the various
factors and summarizes your credit information into a three-digit number
ranging from 000 to 999, depending on the insurance company and the credit
scoring model they use. Generally, the higher the number, the more financially
responsible the consumer.
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. Effective January 1, 2003, Idaho law prohibits insurers
from refusing to issue you a new policy or from nonrenewing your existing
policy based primarily on information obtained from your credit report.
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. Other insurers use credit alone to
determine your rate. The new law also prohibits insurers from charging a higher
premium than would otherwise be charged based primarily on your credit
Often, the term "underwriting" is considered to include rating.
How do I know if an insurance company is looking at my credit?
Some producers and companies will ask for your Social Security number to obtain
"consumer information," "background information," or an "insurance
bureau/credit score." When an application for insurance is submitted, consumers
should ask their insurance producer 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?
Possibly. 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 are young and have not yet established a credit
history; if you do not 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. Although many companies will not 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 producer or
insurance company to make sure they are using your correct Social Security
number, birth date, or other information to find your records.
What parts of my credit information are companies using?
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. Following is a list of the more
common factors used:
Major negative items - bankruptcy, collections, foreclosures, liens,
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 have been in the credit
Home ownership - whether you own or rent.
Inquiries for credit - number of times you have recently applied for new
accounts, including mortgage loans, utility accounts, credit card accounts,
Number of credit lines open - number of major credit cards, department
store credit cards, etc. that you have 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.
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 a producer or company tell me what my credit score is?
No. In fact, the producer 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
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
Lastly, since the national credit bureaus do not 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.
If I do not know my score, and my score varies from company to
company and day to day, how will I know if my credit is affecting my insurance purchases?
The FCRA requires an insurance company to tell you if they have taken an "adverse action" against you, in whole or in part,
because of your credit report information. If your 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 so that you can get a free copy of your credit report.
Examples include canceling, denying or not renewing coverage, giving the consumer a limited coverage form or charging a higher
premium. For example, notification could come either verbally or in writing from either the producer or the insurance company,
and notification could come at the first policy period or at each renewal. The best way to know for sure if your credit score
is affecting your acceptance with an insurer for the best policy at the best rate is to ask.
How can I improve my credit score if I have been adversely affected?
Insurers and credit scoring model developers suggest the following ways to
improve your credit:
- Do not try to "quick fix"' your credit overnight or you could end up hurting
your score. Instead, understand that the most important factors, generally, are
late payments, amounts owed, new credit applications, types of credit,
collections, charge-offs, and negative items such as bankruptcies, liens, and
- Create a plan that will improve your credit over time. Pay your bills on time
(pay at least the minimum balance due, on time, every month). Keep credit
balances low, especially on revolving debt like credit cards.
- Apply for new credit accounts sparingly.
- Keep at it. Your snapshot will improve over time if you make changes now and
continue to improve. If you show good credit behavior over time, your credit
score may improve as a result.
What can I do if I suspect that my credit report contains inaccurate
or erroneous information that is adversely affecting my credit score?
If your insurance company has taken an "adverse action" against you as a result
of your credit, you are entitled to a free copy of your credit report from the
credit reporting bureau they used. However, since 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. Correcting errors on one
credit report may not fix the errors with the others. You may have to pay a
nominal fee (probably less than $10 for each report). Under federal law, you
are entitled to a free copy of your credit report if you have been denied
credit or insurance, if you are on welfare, if you are unemployed, or if you
are a victim of identity theft.
If you find errors in your credit report, advise the credit bureau. In addition,
you should immediately notify your insurance producer and company and ask if
these errors will make a difference in your insurance purchase. Do not wait
until the matter is resolved by the credit bureau. Small errors may have little
or no effect on your credit score, but significant errors could cause the
insurance company to disregard the score and possibly reverse the adverse
The credit bureau will contact the reporting entity (bank, credit card company,
collection agency, court clerk, 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 or correct the information
on your 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 is sent out.
Ensure that 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 is a good idea to obtain a new copy
of your credit report several months later to make sure the incorrect or
erroneous information has not been reported again.
Most consumer groups suggest that you get a copy of your credit report from all
three credit bureaus once a year to make sure there are no errors or to correct
them before they become big problems.
The three national credit bureaus are:
or 888-397-3742); and
Trans Union (www.transunion.com
Where can I go for help with credit problems?
If you cannot resolve your credit problems alone or need additional assistance,
there are non-profit credit counseling organizations that may be able to assist
you. In addition, non-profit counseling programs are sometimes operated by
churches, universities, military bases, credit unions, and housing authorities.
You can also check with a local bank or consumer protection office to see if
they have a list of reputable, low-cost financial counseling services.
Some credit repair firms promise, for a fee, to get accurate information deleted
from your credit file. Be wary of those entities because accurate information
cannot be deleted from your credit record. You have the same access to credit
reporting agencies that credit repair firms do, and you are entitled to dispute
credit report items for free.
Will a less-than-perfect credit score haunt me forever?
The best way to find out if and when your company will re-evaluate and re-tier
or re-assign you is to ask. Some insurance companies look at your credit
periodically and will place you in the appropriate company or rating tier based
on your current information. If you were originally charged a higher rate
because of your credit and you improve your credit over time, you may receive a
lower rate the next time the company looks at your credit.
Other insurance companies look at your credit only at the time you first apply
for insurance. Even if you improve your credit history, the company will not
take your improvement into account and you will continue in the higher-priced
company or rating tier.
Where can I get more information?
Ask your insurance producer or company if they have educational material about
their use of credit.
Search the Internet, but be sure the information you access deals specifically
with use of credit by insurance companies.
Contact the Federal Trade Commission for information about the FCRA or its
consumer brochures on credit by calling toll free at (877) 382-4357 or visiting
its website at www.ftc.gov .
Contact the Department of Insurance by calling our Consumer Assistance Hotline
toll free at (800) 721-3272 or visiting our website at doi.idaho.gov
FINAL POINTS TO REMEMBER
- There is a good chance your current insurance company or prospective insurer is
looking at your credit information.
- Ask your auto and homeowner's insurance producer or company whether they are
using credit information, how they are using it, and whether it is affecting
- Get a copy of your credit report from each of the three national credit bureaus
and correct any errors. Notify your insurance producer and company of any
errors and tell them your side of the story.
- Improve your credit history if you have had past credit problems. Ask your
producer or company for the top reasons for your credit score. If your credit
score is causing you to pay higher premiums, ask if they will re-evaluate you
when you improve your credit.
- Shop around for insurance. Insurance rates based on credit information can vary
dramatically from company to company.
Need more info? Contact us at 208 334-4319 or email us .
Consumer Affairs Officers are available to answer your questions 8-5 M-F MST