Information is power. In today’s world, knowing who knows what about you is your best bet at leveling the playing field. Here’s what you need to know about insurance credit scores and whether a less than stellar score is why you’re not getting the lowest possible auto insurance and homeowners insurance quotes.
In the mid-1990s, insurance companies started using credit information to determine what to charge for auto insurance and homeowners insurance, and sometime even whether to deny coverage. They reasoned that your use of credit was a pretty good predictor of the kind of risk you represented. Ever since, consumer advocacy groups have maintained that the practice discriminates against people who have lost their jobs or suffered from economic downturns through no fault of their own.
Currently only a handful of states have outlawed the practice outright. These include California, Massachusetts and Hawaii for auto insurance and Maryland for homeowners insurance. But this year legislators in 23 states introduced bills to ban, restrict or regulate the use of credit information by the insurance industry. Many of these bills have already died (including Washington and Wisconsin), been postponed indefinitely (Colorado), or face law suits questioning their validity (Michigan).
Unless you live in one of the states that bans the use of credit information, you should understand that insurers can and do collect the following information to determine your premiums.
- Bankruptcies, collections, liens and foreclosures
- Number and frequency of late payments and other past payment history data
- The length of your credit history
- The number of major credit cards and department store credit cards you have open
- The number of times you’ve recently applied for new accounts and loans
- How much of your available credit you’re using
- Having no credit history at all may or may not have an impact on your insurance rates
Know your rights. Insurance companies are required by federal law to notify you if they have taken an adverse action due to your credit history. An adverse action can include denial or cancellation of coverage, a change in the terms or amount of coverage, and charging your more than they would have if they hadn’t accessed your credit info. They also have to tell you which credit bureau supplied the information so that you can take steps to correct any mistakes in that report. You have a right to receive a free copy of your credit report every 12 months from each of the three national credit bureaus: Equifax, Experian and TransUnion.
Keep in mind that insurance credit scores info isn’t the only thing that can impact your insurance-worthiness. Insurers also look at other factors that show responsibility, risk-taking behavior and stability. These can include how long you’ve been employed, how long you’ve been insured, accident and traffic violations, and claims history.