Most insurance companies believe that your credit history can be used to predict insurance claims-filing activity. If you have a better credit history, it will mean fewer claims and also fewer and smaller losses for the company. A lower credit score would mean a bigger risk.
It is widely acceptable for insurance companies to use this information. The Federal Fair Credit Reporting Act says that insurance companies have a permissible purpose to look at your credit information without your expressed permission, for underwriting practices. Underwriting is the process where an insurance company gathers information and decides whether or not they will insure you. Rating is a process that determines how much you pay for insurance.
How do you know if your company are using your credit history? The simple answer is: ask!
You should also ask if the company will check the credit histories of other people (such as family members) insured by your policy.
Is your premium based entirely on your credit history? It is possible that your company only look at your history, however, most rely upon a credit-based insurance score.
Things that may be used in credit-scoring include:
- Public records about bankruptcy, collections, foreclosures, liens, charge-offs, etc.
- Payment history with the number and frequency of late payments and the days between the due date and late payment date.
- Length of credit history
- The number of times you have recently applied for new credit.
- The number of credit cards and whether you use them or not.
- How much you owe compared to how much credit is available to you.
Insurance companies do not want to stop using credit-based insurance scores. They claim that the current system improves the relationship between the insurance risk and the related price, so that those with a higher risk exposure pay more and those with a lower risk exposure pay less. They also claim that rates in general would go up if the system was no longer allowed.
So, your credit score matters! Make sure you know yours.
Finally, there are two things to remember:
- A credit score is just a snapshot in time. If it is low, you can improve your credit score over time. Make a plan!
- Insurance companies use credit information in different ways. Your insurance rates can and will vary from company to company.