What is “Credit Scoring”?
A credit score is a number insurance companies assign consumers based on their credit history, such as bill paying history, the number and type of accounts they have, late payments, collection actions, outstanding debt and the age of their accounts.

Why do insurance companies use credit information?
Some insurance companies believe there is a correlation between financial responsibility and insurance losses. They believe that credit information is a good measure of financial responsibility. They believe that consumers who show less financial responsibility will file more claims, so they should pay more for their insurance.

Many consumer groups feel insurers should not use credit information to determine premiums or to decide who they will insure. Some consumer groups believe that the use of credit information may have a harmful impact on minority groups that result in those groups paying more for insurance.

What kind of credit information do insurance companies use?
Most companies that use credit information use an “insurance credit score”. An insurance credit score is calculated using information about your credit history. The factors used in many scoring models are:

• Public records (such as bankruptcy, collections, foreclosures, liens, and charge-offs). Public records generally lower your insurance credit score.
• Past payment history (the number and frequency of late payments and the days between due date and late payment date). If you have not paid your bills on time, your insurance score will go down.
• Length of credit history (the amount of time you’ve been in the credit system). A longer credit history tends to raise your insurance credit score.
• Inquiries for credit (the number of times you’ve recently applied for new credit, including mortgage loans, utility accounts, and credit card accounts). Shopping for new credit tends to lower your insurance credit score.
• Number of open lines of credit (including the number of major credit cards, department store credit cards). Having too much credit tends to lower your insurance score. However, it generally is not a good idea to cancel a credit account that you have had for a long time. A long credit history helps your score.
• Types of credit in use (such as major credit cards, store credit cards, finance company loans, etc). Generally, major credit cards are treated more favorably than other types of consumer credit.
• Outstanding debt (how much you owe compared to your total available credit). Too much outstanding debt tends to lower your score.

Insurance credit scores are not uniform among insurance companies. Insurance companies have different views on which factors are more important. For example, one company might feel that public records are more important than past payment history. Another company might take the opposite view. How much weight a company gives each of the factors determines, to a large extent, your insurance score with that company.

What is a good insurance credit score?
There is no single answer to this question. Generally, a good insurance credit score will translate to lower premiums. However, insurance companies use different scoring calculations, so different insurers will likely give you a different score. That’s why it pays to shop around on a regular basis to make sure your premiums are competitive. And shopping for insurance will not affect your credit score.

Is my premium based entirely on my insurance credit score?
No. Both auto and homeowners premium are based on factors other than credit history. Your auto insurance premium is based on factors such as your driving record, the type of car you drive, and where you live. Your homeowner’s premium is based on factors such as where you live and the cost to replace your home. Credit history is only one of the number of factors insurers use to rate your policy.

What can I do if there is incorrect information in my credit report?
If you report an error, the credit bureau must investigate the error and get back to you within 30 days. The credit bureau will contact whoever reported the information. Credit information is often reported by banks, credit card companies, collections agencies or a court clerk. If the investigation shows the information is wrong or if there is no proof it’s true, the credit bureau must correct your credit report.

You can ask the credit bureau to send a notice of the correction to any creditor or insurer that has checked your file in the past six months. Once the error is corrected, it’s a good idea to get a new copy of your credit report several months later to make sure the wrong information has not been reported again.

If the information in your credit report is correct, the credit bureau will not change the information in your credit report. However, the FCRA lets you file a 100-word statement explaining your side of the story, and the credit bureau must include your statement with your credit information each time they send it out. Make sure your insurance company has a copy of your statement, and ask if they will take your statement into account. Most consumer groups suggest you get a copy of your credit report once a year. Since the three national credit bureaus do not share information, it is a good idea to get a copy of your credit report from each of them. Each report may have different errors. If you correct on one credit report, it may not fix the errors on the other credit reports.

The three national credit bureaus are:
• Equifax: www.credit.equifax.com | 800-685-1111
• Experian: www.experian.com | 888-397-3742
• Trans Union: www.transunion.com | 800-888-4213

Tell your insurance company. Don’t wait until the credit bureau investigates the errors to contact your insurer. Tell your insurance company right away and ask if the errors will make a difference in your insurance. If the errors are big, tell your insurer that you are disputing the information and ask if they will wait to use your credit information until the errors are corrected. Small errors may not have much effect on your credit score. But if the errors are big, it can make a big difference in your premium.

How can I improve my credit score?
You must find out what attributes of your credit history were used to calculate your credit score. Consumer reporting agencies, such as Fair Isaac and Choice Point, provide insurance companies with up to four factors that have had a negative impact on your insurance credit score. The agent or company should be able to tell you which items in your credit history had the most impact on your score.

Potential ways to improve your credit score:

• Don’t try to “quick fix” your credit overnight. You could end up hurting your score. For example, your score may go down if you cancel a credit card that you have had a long time.
• Don’t pay someone to “fix” your credit history. Some credit repair firms promise, for a fee, to get accurate information taken out of your credit report. Accurate information cannot be deleted from your credit report. Some credit repair firms promise to “fix” your credit report by challenging information on it. They charge you a fee to do that. This is something you can do for yourself without paying the fee.
• Create a plan to improve your credit over time. Pay your bills on time. Pay at least the minimum balance due, on time, every month. If you can’t make a payment, talk to your creditor. Work to reduce the amount you owe, especially on revolving debt accounts like credit cards.
• Limit the number of new credit accounts you apply for. Several applications for credit in a short period of time will usually lower your credit score.
• Keep at it. Your credit history will improve over time if you make changes now and continue to improve. If you manage your credit better, your credit score will improve over time.

Will my credit history haunt me forever?
No, but you must be diligent to make sure you are getting the best deal for your insurance coverage. Remember, an insurance credit score is a “snapshot in time”. If your premiums are high because of your credit history and you take steps to improve your record, you should:

• Ask your insurance company to re-evaluate your insurance credit score at renewal
• Shop for new insurance at renewal to see if better prices are available
  

Points to consider about your credit

• There is a good chance your current or prospective insurer is looking at your credit.
• Ask your insurance agent or company if they use credit information, how they use it and whether it affects your premium.
• Get a copy of your credit report from each of the three national credit bureaus and correct any errors. Tell your insurance agent and company about any errors, and tell them your side of the story.
• Improve your credit history if you have had past credit problems. Ask your agent or company primary reasons (factors) that your insurance credit score is low and work to improve those pieces of your credit history. If you are paying higher premiums because of your credit history, ask your insurer to re-evaluate you when your credit improves.
• Shop around for insurance. Insurance companies use credit information in different ways, so your rates can vary dramatically from company to company.