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Your credit history could influence your home insurance rates

The Insurance Information Institute (III) reports a growing number of insurers are using credit-based insurance scores to decide who gets homeowners coverage and how much they pay. As a result, III claims all else being equal, a person with a good insurance score will pay much less for insurance than someone with a poor score. Credit history and insurance rates

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“An insurance score is different from a credit score,” explains Jeanne Salvatore of III. “An insurance company uses credit information, together with your driving record and insurance history, to predict whether you are more or less likely to file an auto or homeowners claim,” adds Salvatore. “This allows them to provide insurance to more people and to offer it at a lower cost to those who qualify.”

Salvatore says to maintain a good credit history, follow these steps:

  • Set up a budget and stick to it.
    Salvatore says financial experts recommend homeowners determine exactly how much money they are earning versus how much they owe. Too often people make financial decisions based on how much they think they will earn, rather than what they are currently making.
  • Pay bills on time
    Promptly paying all bills will help build a strong credit history, while missed payments can have a devastating effect. Late payments can also be more expensive since they frequently result in extra fees or other penalties.
  • Use credit responsibly
    Remember, credit is a loan -- one that will need to be re-paid with interest. Monitor monthly bills and make spending adjustments accordingly. Also, avoid spending up to the limit on credit cards. Salvatore says it’s a good idea to have credit available for emergencies such unplanned medical costs or car repairs.
  • Keep in touch with creditors
    Anyone who is expecting a bill and does not receive it in the mail should contact the creditor, landlord or utility immediately. A lost bill can easily turn into a late payment. Those who find themselves in a financial bind should contact their creditors and arrange a payment schedule that is mutually acceptable.
  • Consider credit counseling
    Those who find themselves in a financial bind should consider credit and money counseling. Information is available from the National Foundation of Credit Counseling at http://www.nfcc.org or the American Center of Credit Education at http://www.acce-online.com/.

For additional information regarding credit, contact the Consumer Data Industry Association at http://www.cdiaonline.org or access http://www.myfico.com to get a copy of your credit score. Those with insurance questions can contact the Insurance Information Institute at http://www.iii.org or call the National Insurance Consumer Helpline at 800-942-4242.

Is it fair?

Is it fair for an insurance company to base your homeowners premiums, in part, on how well you pay your bills?  Michigan Financial and Insurance Services Commissioner Frank Fitzgerald is one of the state regulators asking that question.

“Insurance companies legally can, and do, use credit history to establish insurance rates in Michigan," says Fitzgerald. "This practice is considered a discount for homeowners and automobile insurance, just like discounts for seat belts or fire alarms. Because the link between credit history and the likelihood of a consumer filing a claim is not clear, the increasingly common practice of using credit to set insurance rates has raised many questions."

Fitzgerald issued an order in February 2003 to insurance companies doing business in his state to provide policyholders with more information about how credit histories are used to set premiums. “Consumers’ overwhelming concern about the use of credit information to set insurance rates is due to the lack of information available,” says Fitzgerald. “Insurance companies doing business in Michigan that establish consumer credit scores to set insurance rates will have to recalculate scores annually or when a consumer corrects their credit history, provide detailed information about the company’s use of credit, and justify the company’s use of credit scoring.”

Discrimination?

Mike Kreidler, the insurance commissioner for the state of Washington, released a study in January 2003 on the use of credit scores to set insurance rates in his state.  Kreidler says he found evidence the process is not always fair.

"The intent of the study was not to single out a particular company, but to see if industry-wide use of credit scoring in insurance results in discrimination against the poor or people of color," Kreidler says. "It's clear that interesting questions have been raised that warrant further investigation."

Insurance companies provided data to Kreidler’s office on their policyholders.  The information included the age, gender, policy start dates, credit scores and rate classifications for those customers.

Kreidler’s office contacted approximately 3,000 of those policyholders, to ask them about their ethnicity, marital status and income level.

Kreidler says credit-based insurance rates tended to favor wealthier policyholders. The study found as incomes rise, credit scores improve and premiums go down. Kreidler says credit scoring raised the average premiums for poor policyholders relative to more affluent insurance customers.

Kreidler says ethnicity was found to be significant in some cases. In general, Asian/Pacific Islanders and whites in Washington State had better credit scores than other ethnic or racial groups. Kreidler says when other minority groups had significant differences from whites, “the differences were in the direction of higher premiums.” Due to the differences among the three insurance companies studied and the small number of minorities in the sample, Kreidler admits the results for ethnicity were not broadly conclusive.

"The industry alleges credit scoring is an income-blind, color-blind tool for assessing risk," says Kreidler. "Our study indicates credit scoring is not blind to income and the jury is still out on how it impacts race."

"As co-chair of the National Association of Insurance Commissioners' working group on credit scoring, I intend to pursue a more broad-based study at the national level," says Kreidler. "It is likely this study will need to be conducted in states with larger ethnic minority populations."

Insurers defend credit-based rates

Bill Schroeder of the American Alliance for Insurers defends the use of credit histories in setting premiums as a fair way to help distinguish which customers are the least likely to file claims, and therefore get the lowest rates. "The Alliance believes that insurers should be able to consider credit information in their underwriting and rating decisions," Schroeder says. "Credit history and credit-based insurance scores are fair and accurate tools that allow insurers to rate risks with greater certainty, to the ultimate benefit of consumers who are charged rates that more accurately reflect their risk of loss."

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