For the past 20 years, insurance companies have used your credit history to decide whether or not to offer you an auto or home insurance policy, which of their policies to make available to you, and how much to charge you. Insurers call this practice credit-based insurance scoring. haven’t you heard of this? That’s not surprising because insurers go to great lengths to keep this information under the radar. Consumer advocates including Policyholders United, the Center for Economic Justice and the Consumers Union have long fought this unfair industry practice.
How does your credit score affect your insurance?
With some insurance companies, a consumer with the worst credit score (all else being equal) can pay two, three or four times as much as a consumer with the best credit score. But even though your credit history is likely to have more of an impact on your premium than any other factor (your driving record or the condition of your home), insurers don’t advertise their use of credit information. Instead, you’ll see commercials claiming that responsible drivers save money, even though a driver with a clean record may pay more than a driver with an accident or violation because of his or her credit history.
Consumers should be aware of the importance of credit history for insurance. In most states, insurers can pretty much do whatever they want with your credit information because most insurers today will only quote you a very high premium if you refuse to let the insurer get your credit history. And once she has a policy with an insurer, the insurer can check her credit history whenever she wants.
Are insurers completely free to access and use your credit history?
Some states prohibit insurers from using consumer credit information: California, Massachusetts and Hawaii for auto insurance and Maryland and Hawaii for homeowners insurance. In other states, state or federal law requires the insurance company to provide you with some important notices, the most important of which is the Federal Fair Credit Reporting Act (FCRA) Notice of Adverse Action. The FCRA requires any user of a credit report to notify the consumer if the use of that report resulted in an adverse action, which, in the case of insurance, would be a denial of coverage or a premium higher than that of a consumer. with an average insurance credit score. these adverse action notices come with your policy or policy renewal information, but can be difficult to identify because insurers don’t like to use the word “adverse.”
If you receive a notice of adverse action, you must list up to four reasons why your insurance score was not better. Unfortunately, in most states, “reason codes” are difficult to understand. but they are a starting point. Federal law requires the credit reporting agencies (Experian, Equifax, and Transunion) to provide you with one free credit report each year. if you receive a notice of adverse action, you are also entitled to a free credit report from the credit bureau used by your insurance company.
How can you find out what your credit score is and how your insurer is using it?
A consumer can get one free credit report a year from each of the big three credit bureaus. beware: most sites that promise a free credit report are not free because they require you to buy something. www.annualcreditreport.com is the official site sponsored by the credit bureaus to comply with the fcra requirement. It’s helpful to obtain and compare credit reports from all three bureaus to see what information is missing or incorrect on any one report, particularly the report from the bureau your insurance company uses.
Another website, www.creditkarma.com, will provide a free credit report and credit scores. one of the credit scores is an insurance score. It’s interesting and helpful to see how credit scores differ for loans and insurance. however, the insurance score on the credit karma site is based on a transunion model and transunion credit data; it is likely not the credit score calculated and used by your insurance company.
A recent change to the fcra now requires insurers to provide consumers with insurance credit scores if the insurer took adverse action. As with reason codes, having the score may not be very useful unless insurers show consumers how the score affected the insurance premium. in either case, consumers should ask the insurer what insurance credit score was used in the premium calculation, where that score fits in the range of all consumer scores (what percentile), and what score is needed to get a better (lower) premium.
mistakes on credit reports are common and can be difficult to correct
Your insurance credit score can be affected by errors on your credit report: incorrect information and missing information. It’s important to check your credit report with the credit bureau used by your insurance company because the information on your credit reports can be very different between the Big Three credit bureaus. Incorrect information, an indication of a late payment that was not actually made, or an indication of a bankruptcy that you did not have, can lower your insurance score and increase your premium.
To give you an idea of how different insurance companies use consumer credit information, the website www.helpinsure.com created by the texas department of insurance may be helpful. This website allows consumers to compare auto and homeowners (for Texas) rates between insurance companies for specific customer profiles. By changing the profile from good credit to bad credit, a consumer can generally see how much of an impact the insurance credit score has on the premium for individual insurance companies. Although the site is based on Texas auto and homeowners insurance rates, insurers that rely heavily on consumer credit information in one state tend to do so in all other states where the use of information is permitted. credit.
Despite insurers’ claims that “credit-based insurance scores reward responsible consumers,” a lack of information can also hurt your insurance score because your score is based on things like how many times you’ve reviewed your credit report (“hard inquiries”), what type of credit you have, your balance relative to the credit limit, how long you’ve used credit, and how many credit cards you have, all regardless of whether you pay your bills bills on time.
Why is credit scoring unfair?
Insurance credit scoring is unfair for several reasons. penalizes consumers who are victims of medical or economic catastrophes. Nearly 90% of bankruptcies are due to job loss, medical bills, or divorce. given the high cost of health care, even for those with insurance, and the very high and long-lasting unemployment of the great recession, it is unfair for insurers to charge consumers higher premiums simply because consumers have been victims of a loss of worked. or a terrible medical condition.
Insurance credit scoring is unfair because it penalizes consumers for rational behavior. For example, if you shop for insurance, each insurance company will check your credit and increase the number of inquiries on your credit report, which will affect your score. If you like to use a credit card for rewards, you’ll get a worse credit score than if you spread charges across two or three cards because the debt-to-card limit ratio on one card is high. If you open a card account at a department store or home improvement store to take advantage of the 10% discount on first-time purchases, your score will decrease due to the additional inquiry and line of credit.
Insurance credit scoring penalizes low-income and minority communities, not because low-income or minority consumers do not manage their money well, but because the negative factors used in insurance scoring models are biased in against low-income and minority consumers, and because the absence of credit information hurts a score as much or more than the presence of negative information. Just as minority and low-income consumers were often the targets of predatory lending practices, insurance credit scores reflect and perpetuate historical inequalities.
what can you do about a high insurance premium caused by insurance credit scores?
If you’re having problems with your credit report due to unemployment, medical costs, divorce, or some other major “life event,” ask the insurance company if they’ll make a life event exception and use a better insurance rating to determine your premium. . Many state laws require insurers to consider life events, but there are no standards for such consideration. contact the insurance company or agent and ask them to consider your life event.
Review the reasons in the notice of adverse action along with a copy of the credit report for errors or missing items. Once again, insurers make it difficult for consumers because the credit report a consumer gets from the credit bureau is not the same credit report the insurance company uses.
Look for insurance companies that offer discounts for positive actions, like pay-per-mile car insurance, which allows you to drive less and pay less for your insurance.
complain in writing to your elected officials and the department of insurance about the use of credit information by insurers. insurers have gotten away with it in most states by claiming that insurance scores are “accurate predictors of future claims” and banning insurance scoring would cause “good risks” to subsidize “bad risks” and would lead to higher rates for many customers. this definition of “fair” may work for an insurance company actuary, but not in the real world. insurers have won most legislative battles with big political contributions and big threats (to raise rates for many consumers). Tell your elected officials to look out for consumers, not taxpayers, and that insurers won’t raise rates for consumers they think are the best insured.
For more information on credit scoring, see the websites of the Center for Economic Justice and the National Association of Insurance Commissioners.