Ask the Car Insurance Expert
Do all insurance companies use credit scoring?
Most auto and home insurance companies use credit scoring when permitted by state law. Life and health insurers do not use credit information to determine premiums or whether to issue a policy.
Unlike lenders, which use credit scores to determine the likelihood that customers will pay back their loans on time, insurance companies use credit information to gauge the likelihood that customers will file claims. Insurers contend there's a strong correlation between your credit history and the number and cost of claims you file. They say people with poor credit are more likely to file claims than people with good credit.
That notion is controversial. Consumer advocates argue the practice is unfair to people who have suffered financial setbacks, discriminates against low-income people and disproportionately hurts minorities.
Auto and home insurers began using credit information in the mid-1990s, and the practice grew quickly. A 2007 Federal Trade Commission study reported that all auto insurance companies used credit-based insurance scores in some capacity.
State laws vary on the issue of credit-based insurance scoring. Some states have banned the practice for home or auto insurance or both, and some put limits on it. Oregon, for instance, lets insurance companies use credit information when evaluating new applicants, but only if insurers also consider other relevant factors, such as a person's driving record or claims history. An insurer can use credit information for the first 60 days of a new policy to determine whether to provide coverage or adjust the premium. But Oregon state law prohibits insurance companies from using credit scoring to increase premiums, cancel a policy or not renew a policy for existing policyholders.
Check with your state's insurance department to learn the rules for credit-based insurance scoring where you live. For more, see How your credit history affects your home and car insurance rates.