Does My Credit Affect My Insurance?

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Increasingly, insurance companies are using credit reports to develop credit "scoring systems" that classify consumers based on several factors. As a consumer, how you're classified – whether you fall into a preferred, average, or high-risk class – can impact what rate an insurance company charges you.

The use of credit scores in insurance rating became commonplace over a decade ago with homeowners insurance. It grew out of companies' attempts to create rating plans that would assess risk levels as accurately as possible, in order to predict their own expenses as well as charge appropriate rates. Banks and other financial institutions had long used credit information in determining risk on business such as home loans, and the correlation between those financial records and insurance risks became clear. The trend moved into the auto insurance industry, and as soon as the math was done, insurers realized they were onto something.

The laws and regulations that govern insurance are set at the state level, so where you live determines what information companies can gather and how they can use it, as well as what your rights are. Generally, in states where credit may be used for underwriting and/or payment options, insurance companies use your credit information like this: They plug basic credit information (such as bankruptcies, missed payments, the number of cards you have and how much activity they see) into formulas that also take into account your accident history, years you have been driving, where you live, your age, gender and assorted other relevant facts about you.

The formulas assign varying levels of importance to these based on rather complex data such as the company's loss history and how statistically important the factors have been shown to be for that company. (For example, males are more likely than females to get into accidents. How much more likely depends on still other criteria, such as what kind of cars they drive.) From a mathematical maze of interlocking facts and levels of importance comes a risk level – and corresponding rate plan.

Many states require insurance companies to tell consumers what top factors have been used in determining rates, but your insurer may not even understand the exact significance of some of the numbers, since they often come from outside sources. If you're interested in finding out if credit was used to determine your rates, contact your insurance carrier.

In conclusion, it is very important to stay on top of your credit. Experts recommended that you obtain a credit report at least once a year (see the sidebar on the front page of this newsletter for a special offer for a free credit report). Also, how insurance carriers use your credit differs from company to company, so it’s very important to shop around and compare rates from various carriers.