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A Consumer's Credit Score May Affect Auto and Homeowners Insurance Premiums

Insurance companies may look at your credit history when you apply for new auto or homeowners insurance, or if your current policy is up for renewal. Here is some valuable information that may help you understand how insurance companies use your credit history.

What is an insurance credit score?
A credit score is a snapshot of your credit at one point in time. Insurance companies enter information from your credit history and your insurance application into a credit-scoring computer model to calculate a specific insurance credit score. Each factor chosen for the model is assigned a weighted number. Your insurance credit score ranges from 0-999, with a higher number conveying a better score.

What kind of credit information do insurers use?
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

Some states have laws that limit what credit information insurers may use and how they use it. For more information, contact your state insurance department.

How is an insurance credit score used?
If your insurance company relies on credit scoring, it might use your credit score to underwrite and rate your policy.

  • Underwriting is the process of deciding whether to issue you a new policy or to renew an existing policy.
  • Rating is the process that determines how much you pay for insurance. 

In addition to using credit information, insurance companies will use other, more traditional rating factors to determine the premium you pay for your auto or homeowners insurance policy. Some of these traditional rating factors include:

  • Auto Insurance – driving record, type of car you own, where you live
  • Homeowners Insurance – where you live, cost to replace your home, claim history

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.

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 companies will charge you more, while other companies will use the previously mentioned “traditional factors.” 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.

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