Your Credit Score and How It Relates To Insurance (1)

Credit Score

It’s a relatively new thing for insurance companies to look at consumer credit information. In California some insurance companies started using credit reports during the 1980’s for renter’s insurance policies and in the late 1990’s the industry as a whole started to use insurance credit scores to decide:

  • Whether to issue or renew an insurance policy.
  • How much to charge for the insurance premiums.

Credit scoring has been met with great controversy both within the insurance industry and with the public. In later Blog entries, I will outline several State and National issues that are currently underway to help resolve some of the controversial and consumer concerns. For this Blog I want to focus on What Credit Scoring is and why insurance companies feel the need to use credit information to offer insurance and set the premiums.

A credit score is a number insurance companies assign consumers based on their credit history. The same general factors apply as do for any other credit related issue, such as late payments, defaults and lack of credit history in general. The same information used to obtain a loan is collected, however the insurance companies in many cases use their own scoring methods.

The federal, and many state, Fair Credit Reporting Acts (FCRA), give insurance companies the right to look at credit information without your permission for underwriting insurance policies. The federal law can be found at www.ftc.gov Each state may or may not have laws, which grant the same or similar access to an insurance customers credit reports. Many states however, are passing legislation giving customers certain rights and regulating the use of credit information by insurance companies.

When credit scoring started most customers and agents were caught off guard by the change and added underwriting issues involving a persons credit history. Many agents and insureds were not sure why insurance companies needed to use credit information. There was quit an uproar in the industry and these are the reasons some insurance companies believe there is a correlation between financial responsibility and insurance losses:

  • Insurance providers (Insurers) believe credit information is a good measure of financial responsibility.
  • Insurance companies have statistically proven consumers who show less financial responsibility will file more claims, more often.
  • Insurance companies believe that people with less access to credit will file more claims for smaller losses another person may have taken care of by using the credit they have.

Many consumer groups feel insurers should not use credit information to determine premiums or to decide who and what they will insure. Some consumer groups believe that the use of credit information may have a harmful impact on minority groups when the result leads to those groups paying more for insurance. With the rampant rate of identity theft consumer groups are also concerned customers will be denied insurance or pay higher premiums due to fraud and errors on their credit reports.

Photo credit for this blog entry: sxc (no use restrictions for this photo)

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