Arizona Home Search

Understanding How Insurance Companies Use Credit Information

If you are shopping for auto or homeowner’s insurance, or if your current policy is up for renewal, your insurance company may be looking at your credit history. Here are some tips to help you understand how your credit information may be used and how it may affect your insurance premiums.  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. The following information is provided to help you understand how your credit information is being used for personal auto and homeowner’s insurance, and how it may affect your insurance purchases.

1. 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.

2. 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.

3. Does using credit information discriminate against lower-income consumers?

Insurance companies 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. 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 disproportianate impact on minorities.

4. What kind of credit information are insurance companies using?

Although some insurance companies still look at your actual credit report, most insurance 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.

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.
                    • Homeownership—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.

WhyUseOurServices                                                                    

Making an Informed Decision                                                  Homeowners Insurance Check-up

Choosing a Home Inspector                                                    Homeowners' Insurance Rate Comparison

Choosing a Home Warranty

Choosing Your Homeowners Policy

Understanding the Escrow Process

When It’s Time to Sell