Did you know that insurance companies typically consider yourcredit history, whether positive or negative, when you apply forauto or homeowners insurance? Insurers may use your creditinformation when deciding whether to approve your insuranceapplication and when determining the premium you'll pay.
Why does your credit history matter when you apply forinsurance?
Studies by independent researchers and insurance industry actuarieshave convinced insurance companies that a strong correlation existsbetween your credit history and the likelihood that you'll file aninsurance claim. Using information contained in your credit record,an insurer calculates your insurance score. If your insurance scoreis low, the insurer may consider you to be less of a risk than ifyour insurance score is high.
How is your insurance score determined?
Although methods vary, an insurance company typically calculatesyour insurance score by applying a mathematical formula tostatistically significant factors on your credit record. Thesefactors may include the amount of debt you have outstanding,whether you have serious blemishes on your credit report (such aspast-due amounts, collection actions, and bankruptcies), and thenumber of times you've applied for credit within the pastyear.
Will a low insurance score prevent you from buying insurance?
Not necessarily. Because your insurance score is generally just oneof the factors insurers use to decide whether or not to offer youcoverage, an insurer may decide to approve your application even ifyou have poor credit. However, a low insurance score often placesyou in a higher risk category, and you may end up paying a higherpremium for insurance.
Keep in mind, too, that every insurance company has its ownunderwriting standards. Even if one insurance company rejects yourapplication due to poor credit, another insurance company may issueyou a policy.
What if you have little or no credit history?
In many states, having little or no credit history automaticallyplaces you into the "average" risk category. Other states prohibitinsurers from even using credit as an underwriting factor if youhave little or no credit history.
Can your insurer cancel or refuse to renew your insurance based onyour credit?
In many states, an insurer can cancel or refuse to renew yourinsurance policy if your credit has deteriorated. However, somestates have passed legislation prohibiting insurers from using yourcredit report as the sole basis for making decisions aboutcancellations and renewals.
Is there anything you should do?
Insurers must tell you if they look at your credit history whenthey consider your insurance application or when they determine therate you'll pay for insurance. To find out if your credit historyhas affected your ability to get insurance or your insurancepremium, contact an insurance company representative. Here are someother things you can do:
Since laws vary from state to state, contact your state'sinsurance department if you have questions about the regulation ofcredit-based insurance scoring in your state.
Know your rights. Under the Fair Credit Reporting Act, insurersmust inform you that they've turned down your insurance applicationbased on information in your credit report, and notify you that youhave a right to request a free copy of that credit report.
Shop around for insurance coverage. Different insurers havedifferent policies regarding the use of insurance scores. The costof insurance premiums may also vary, so comparison shop for thebest deal.
Check your credit report once a year. Order copies from the threemajor credit bureaus (Experian, Equifax, and Trans Union) and makesure they contain correct information. Dispute any errors with bothyour creditors and the credit bureaus.
Ask your insurance company to rerun your credit score if you feelthat doing so would improve your insurance rating (many statesallow consumers to request this once per year). But check insuranceregulations in your state first--some states allow insurers to takeadverse action against current customers based on downturns intheir credit scores.
Editor;s Note: This material provided to Jon R. Bergman, CFP byRaymond James Financial Services, Inc., Member FINRA/SIPC.
2011 The Daily Sentinel. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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