Do Insurance Companies Check Credit?

Many consumers wonder whether their credit history influences their insurance rates. This article explores the relationship between credit information and insurance decisions, providing clarity on how these factors interact.

The Use of Credit in Insurance Decisions

Insurance companies commonly use credit-related information for evaluating applicants and determining policy costs in states where permitted. The industry rationale suggests an individual’s financial behavior, reflected in their credit history, can indicate the likelihood of future insurance claims or overall risk. Insurers believe a statistical relationship exists between financial responsibility and potential insurance losses. They do not use traditional credit scores like lenders, but rather information from credit reports to form a predictive tool for insurance risk. This approach helps insurers assess policyholders more comprehensively, alongside other factors.

Understanding Insurance Scores

An insurance score, also known as a credit-based insurance score, is a numerical rating derived from specific characteristics found in a consumer’s credit report. Its purpose is to predict the likelihood of an individual filing an insurance claim and the potential cost of that claim. These scores assess insurance risk, not creditworthiness for loans.

Several types of credit information contribute to an insurance score, including payment history, outstanding debt relative to credit limits, length of credit history, recent credit applications, and the mix of credit types. Payment history often accounts for a significant portion, sometimes as much as 40%, while outstanding debt may contribute around 30%. Unlike a FICO credit score, an insurance score does not consider income, employment history, or demographic data. Both types of scores are based on credit report data but employ different models, focusing on loss relativity rather than loan delinquency.

Impact on Insurance Premiums

An individual’s insurance score directly influences the cost of their insurance premiums. A higher insurance score typically suggests lower risk to insurers, translating into lower premiums. Conversely, a lower score indicates higher perceived risk, potentially leading to increased premiums. Actuarial studies indicate a correlation where consumers with lower credit-based insurance scores are statistically more likely to file claims.

This score is one of many factors insurers use to determine premiums, alongside driving records, claims history, vehicle/property type, and geographical location. The insurance score plays a significant role, potentially leading to substantial differences in rates. Policyholders with lower scores might pay considerably more than those with higher scores for comparable coverage.

Consumer Protections and State Regulations

Consumers have specific rights concerning the use of their credit information by insurers, primarily under the Fair Credit Reporting Act (FCRA). This federal law permits insurers to access credit information for purposes like underwriting policies. If credit information adversely affects a premium or results in an adverse action, the insurer must provide notice to the consumer and identify the reporting agency. Consumers also have the right to dispute inaccuracies in their credit reports.

While federal law allows the use of credit information, some states have enacted specific laws that restrict or prohibit its use for setting insurance rates for certain types of coverage. Some jurisdictions ban the use of credit information for auto insurance, while others prohibit it for both auto and home insurance. These state-level regulations vary. Some states prevent insurers from using a lack of credit history as a negative factor or making an adverse decision based solely on credit information.