Do Insurance Companies Pull Your Credit?

Insurance companies often consider a consumer’s credit information when determining policy rates. This practice is common for various types of personal insurance, including auto, home, and renters coverage. Insurers utilize this data primarily as a tool for assessing risk, aiming to align policy premiums with the likelihood of future claims.

Why Insurers Review Credit Information

Insurance companies review credit information because they have observed a statistical relationship between certain credit behaviors and the likelihood of filing insurance claims. Studies indicate that individuals exhibiting financial responsibility, as reflected in their credit history, tend to file fewer and less costly claims, allowing insurers to better predict potential losses and manage financial exposure.

The use of credit data forms a part of the underwriting process, where insurers evaluate an applicant’s risk profile to decide whether to offer coverage and at what price. This enables them to set premiums that more accurately reflect an individual’s expected risk. Insurers believe this approach helps ensure those who pose a higher risk contribute more to the shared pool of funds, while lower-risk individuals pay less.

Credit-Based Insurance Scores Explained

A credit-based insurance score is a numerical value derived from a consumer’s credit report, specifically designed for insurance purposes. This score is distinct from a traditional credit score, such as a FICO score, which lenders use to predict the likelihood of loan repayment. While both scores originate from the same credit report data, their underlying models are proprietary and aim to predict different outcomes. An insurance score predicts the likelihood and potential cost of an individual filing an insurance claim.

Several categories of information from a credit report contribute to a credit-based insurance score:
Payment history, which assesses the timeliness of past payments.
Outstanding debt, reflecting the amount of current debt.
Length of credit history.
Pursuit of new credit.
Mix of credit types (e.g., credit cards, mortgages).

When an insurance company obtains this information, it is typically a “soft pull” or soft inquiry on the credit report, which does not negatively impact a consumer’s traditional credit score. Insurers cannot use personal information such as race, religion, gender, marital status, age, income, or occupation in these scores.

How Insurance Scores Impact Premiums

A credit-based insurance score directly influences the cost of insurance policies in most states where it is permitted. Generally, a higher insurance score indicates a lower perceived risk to the insurer, which can result in lower premiums for the policyholder. Conversely, a lower score may suggest a higher risk, leading to increased premium costs.

An insurance score is one of several factors used to determine premiums, not the sole determinant. Other considerations include a driving record for auto insurance, claims history, geographic location, and the specifics of the insured property or vehicle.

State Regulations on Credit Use

The use of credit information by insurance companies is subject to state-specific regulations across the United States. While many states permit the use of credit-based insurance scores, several jurisdictions have implemented restrictions or outright prohibitions. For example, some states do not allow insurers to use credit information for setting auto or homeowners insurance rates.

Regulations often dictate that credit-based insurance scores cannot be the only factor used to increase rates, deny coverage, or non-renew policies. Some states require insurers to notify applicants if an adverse decision was made based on their credit-based insurance score. Consumers have the right to request information about whether a credit-based insurance score was used in their policy’s underwriting and rating process.