How Insurers Use Your Credit

Most auto and home insurance companies evaluate consumer credit information when issuing coverage and setting premiums. Learn more about how insurers use your credit here.

Credit & Risk

Visitors seeking online insurance help on our site often ask why insurers consider their credit when issuing a policy. Car and home insurers regularly use an applicant's credit score to decide whether to issue coverage and how much to charge in premiums. This may not make much sense at first, but there is actually a correlation between credit scores and claims risk. Consumers with poor credit scores are more likely to file claims, which means they are a higher risk to insurance companies. Consequently, insurers charge consumers with bad credit higher premiums.

Legality

Did you know that insurers can legally pull your credit history without your permission? The Fair Credit Reporting Act allows insurers to review your credit information without obtaining permission when they evaluate your application to decide whether to issue coverage. However, in order to do so, the insurer must inform you that they may look at your credit information either at the time of application or at policy renewal (if you are already a customer). For online insurance help concerning this regulation, consult the FTC's website.

Types of Credit Information Insurers Use

Most insurers that use credit histories in their decisions use an insurance credit score, which is different from a traditional FICO score. The insurer's website should have online insurance help and disclosures about how they use credit. Here is a list of factors most insurers use in their scoring models:

• Public records: collections, foreclosures, bankruptcies, charge-offs, and liens.
• Past payment history: how many late payments you have and how frequently they occur.
• Length of credit history: the amount of time since you entered the credit system. Longer credit histories improve your score.
• Credit inquiries: applications for credit tend to lower your score.
• Number of open credit accounts: this is usually the number of active credit cards you have. Having too much credit will damage your score.
• Types of credit: a diversity of credit (such as installment loans, department store cards, etc.) will help your score.
• Outstanding debt: high levels of debt will damage your score.