Consumer Alert from the NAIC
Credit Scoring: How Does it Affect You?
If you are shopping for auto or homeowners insurance, or if your current
policy is up for renewal, your insurance company may be looking at
your credit history. Here are some tips from the National Association
of Insurance Commissioners (NAIC) to help you understand how your credit
information may be used and how it may affect your insurance premiums.
- What is Credit Scoring?
A credit score is a snapshot of your credit at one point in time.
The credit information from your credit report is put through
a mathematical formula (credit scoring model) that assigns weights
to the various factors and summarizes your credit information
into a three-digit number ranging from zero to 999. Generally,
the higher the number, the more financially responsible the consumer.
- How is Credit Scoring Used?
If your insurance company relies on credit scoring, they may use
it in two ways:
Some insurers use credit information along with other more traditional
rating factors, such as motor vehicle records and claims history.
Other insurers may use credit alone to determine your rate.
- Underwriting - Deciding whether to issue you a new policy
or to renew your existing policy.
- Rating - Deciding what price to charge you for your insurance
by placing you into a specific rating "tier" or level.
- What Affects a Credit Score?
There are several factors that 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. Following is a list of common factors:
- Major negative items - Bankruptcy, collections, foreclosures,
liens, charge-offs, etc.
- Past payment history - Number and frequency of late payments.
- 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 open credit lines - 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.
- Outstanding debt - How much you owe compared to how much
credit is available to you.
- Know Your Credit History
There is a good chance your current or prospective insurance company
is looking at your credit. Therefore it is a good idea to review
your credit history to make sure it's accurate. Request a copy
of your credit history from Equifax www.credit.equifax.com,
Experian www.experian.com or
Trans Union www.transunion.com.
You can also contact the Federal Trade Commission for consumer
brochures on credit at www.ftc.gov.
The Fair Credit Reporting Act requires an insurance company
to tell you if they have taken an "adverse action" against you,
in whole or in part, because of your credit report information.
If your company tells you that you have been adversely affected,
they must also tell you the name of the national credit bureau
that supplied the information so that you can get a free copy
of your credit report and correct any errors.
- Take Charge of Your Credit History
If your insurance company is using your credit score to evaluate
your rates, you can take steps to improve your premiums.
- Get a copy of your credit report and correct any errors.
Notify your insurance agent and company of any errors.
- Improve your credit history if you've had past credit problems.
If your credit score is causing you to pay higher premiums,
ask your insurer if they will re-evaluate you when your credit
- Get More Information
Insurance rates based on credit information can vary from company
to company, so if you feel your premiums are too high, shop around.
For other insurance consumer tips, you can link to your insurance
department's Web site by visiting www.naic.org.
Click on "State Insurance Regulators - Web Sites," then click
on your state.
The National Association of Insurance Commissioners is a voluntary
organization of the chief insurance regulatory officials of the
50 states, the District of Columbia and four U.S. territories.
The overriding objectives of state regulators are to protect consumers
and help maintain the financial stability of the insurance industry.