What you need to know about insurance credit scoring
Why are some companies using credit information?
A growing number of auto and homeowner's insurance companies are looking at consumer credit information to decide whether to issue or renew
policies or to decide what premiums to charge for those policies. These 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.
Does Ohio law permit insurance companies to use my credit information as a factor in setting my auto and homeowner's insurance rates?
Yes. However, Section 3901-1-55 of the Ohio Revised Code limits what credit information insurers may use and how they use that information.
Specifically, insurers relying on credit scoring for any determination of whether they will cover your Ohio auto or other motorized vehicle,
or for any determination of your premium cost for coverage they offer you:
- Can NOT use your credit score or any aspect of your credit history as the SOLE basis for that determination.
- MUST consider other applicable underwriting factors (such as your driving record, your age, your vehicle model,
your annual miles driven, your location and claims history) in addition to your credit score in making that determination.
How do insurance companies use my credit information?
Each insurer decides what information to use in its credit scoring model. Insurance companies may weigh each factor differently.
Some of the more common credit factors used by insurers are:
- Major negative items - bankruptcy, collections, foreclosures and liens;
- Past payment history - number and frequency of late payments, and days between due date and payment date;
- Length of credit history - amount of time a consumer has been in the credit system.
- Homeownership - whether a consumer owns or rents property.
- Inquiries for credit - number of times a consumer recently has applied for new accounts, including mortgage loans, utility accounts and credit card accounts.
- Number of open credit lines - number of major credit cards and department store credit cards.
- Type of credit in use - major credit cards, store credit cards and finance company loans.
- Outstanding debt - how much a consumer owes compared to how much credit is available.
Is it legal for insurance companies to use my credit information?
Yes. The Fair Credit Reporting Act (FCRA), a federal law, states that insurance companies may look at your credit information without your permission.
How will I know if my credit history has affected my insurance purchase?
The FCRA requires insurance companies to notify consumers if an adverse action is taken because of their credit information.
FCRA defines adverse action to include denying or canceling coverage, increasing premiums, or changing the terms, coverage,
or amount of coverage in a way that harms the consumer. If an insurer takes an adverse action due to your credit history it also
must notify you of the name of the national credit bureau that supplied the information.
Will having no credit history affect my insurance purchase?
It is possible. Depending on your credit history, an insurance company may not find a meaningful credit history.
In that case, some insurance companies will charge you more, while others will not.
If you are young and have yet to establish a credit history, don't believe in using credit, or recently have
become widowed or single and all previous credit was in your spouse's name, you may not have credit information.
In these cases, your insurance purchase may be affected.
How can I review my credit report?
Monitoring your credit report is important because many decisions now are based on how your finances are managed.
You now can receive one free copy of your credit report every 12 months from each of the three national credit bureaus.
To receive your free credit report, visit www.annualcreditreport.com.
Or contact the three credit bureaus directly:
Your credit report and your credit score are two different things.
To obtain your credit score, you will have to buy it from one of the credit bureaus.
However, it may not be the same credit score that the insurer used to make its decision.
How can I improve my credit?
Review your credit report for any false information and outdated items. Create a plan that will improve your credit over time.
Ideas to help improve your credit history are:
- Pay bills on time every month;
- Pay at least the minimum balance due;
- If you can't make a payment, contact the creditor;
- Work to reduce the amount you owe, especially revolving debt such as credit cards;
- Limit the number of new credit accounts.
Your insurance agent or company should be able to identify for you up to four factors that impact your insurance credit score the most.
It may take up to seven years for an accurate, negative report to be removed from your credit report.
You must notify each of the credit bureaus of any errors you find on the report. The credit bureaus do not share information.
The Federal Trade Commission has excellent information regarding a consumer's rights and use of credit.
This information can be found at www.ftc.gov or by calling 1-877-382-4357.
