Most insurers in most states use something derived from your credit history when they price an auto or home policy. It is one of the more contested practices in personal insurance, it is regulated very differently from state to state, and it is routinely confused with the credit score used by lenders.
Not the same as a credit score
A credit-based insurance score is built from credit report data, but it is a different model with a different purpose. A lending score predicts the likelihood of repayment. An insurance score is built to correlate with expected claims frequency and severity.
The two use overlapping inputs and produce different numbers. A person can have a strong lending score and a weaker insurance score, or the reverse.
What generally goes into it
Models are proprietary and vary between insurers and vendors, but the categories that insurance scoring models commonly consider include:
- Payment history, including late payments and accounts in collection
- Outstanding balances relative to available credit
- Length of credit history
- Types of credit in use
- Recent applications for credit, though inquiries generated by insurers themselves are generally not counted
- Public records such as bankruptcies, where state law allows their use
What is generally not in an insurance score: income, employment, ethnicity, religion, marital status, address, and in most models the specific creditors involved. Federal and state law restrict several of these directly.
The insurer's review is normally a soft inquiry, which does not affect your lending score.
Where it is restricted
This is squarely a state law question and the landscape moves.
A small group of states significantly restricts or prohibits the practice, and the restrictions frequently differ between auto and home lines within the same state. California, Hawaii, Massachusetts, Michigan and Maryland are the states most often identified as having the strictest limits, with Maryland taking a partial approach that differs by line and by whether the policy is new or renewing. Oregon and Utah impose narrower restrictions, and several other states limit how heavily credit information may be weighed or what it may be used for.
Separately, many states have adopted rules based on model legislation providing that credit information may not be the sole basis for denying, cancelling or non-renewing a policy, and requiring insurers to consider extraordinary life circumstances on request.
Legislative activity in this area is continuous, and a court has previously struck down at least one state regulator's attempted ban. Verify the current position with your own state's Department of Insurance rather than relying on any summary, including this one.
Adverse action notices
If an insurer takes adverse action based in whole or in part on information in a consumer report, federal law generally requires it to tell you. In practice that means a notice identifying that credit information was used, the consumer reporting agency that supplied it, and your right to obtain a free copy of the report from that agency and to dispute inaccuracies.
If you receive one:
- Request the report from the agency named, at no cost within the statutory window.
- Read it for errors. Accounts that are not yours, balances already paid, and duplicate collection entries are common and correctable.
- Dispute inaccuracies with the reporting agency, which must investigate.
- Ask the insurer to re-rate once corrections are made. It will not happen automatically.
The Consumer Financial Protection Bureau and the Federal Trade Commission both publish guidance on disputing consumer report errors.
Extraordinary life circumstances
Many states require insurers, on request, to provide an exception to their normal use of credit information where a specified event has affected the consumer's credit. The list varies by state but commonly includes catastrophic illness or injury, the death of a spouse, child or parent, divorce, identity theft, involuntary loss of employment, military deployment, and a total loss of the residence in a catastrophe.
This is a request you have to make, with documentation, and insurers are generally not required to volunteer it. If one of these applies to you, ask specifically about the extraordinary life circumstances provision in your state.
The debate, stated fairly
The case for the practice. Insurers point to actuarial studies showing a statistical correlation between insurance scores and claims experience, and argue that using a predictive factor lets them price more accurately, which benefits lower-risk consumers. Regulators in most states have permitted its use on that basis.
The case against. Consumer advocates and several regulators argue the correlation is not causal, that credit history reflects economic circumstance rather than driving behaviour or property maintenance, and that the practice produces disparate outcomes along lines that have nothing to do with risk. That reasoning underlies the state restrictions described above.
Both positions are held by serious people, and the resolution is being made state by state through legislation and rulemaking rather than settled nationally.
What you can do about it
Where it is permitted:
- Pay on time. Payment history is heavily weighted in essentially every model.
- Keep balances low relative to limits.
- Leave older accounts open, since length of history counts.
- Apply for new credit sparingly in the period before you shop for insurance.
- Check your credit reports for errors before you shop, not after a quote disappoints you. You are entitled to free reports from the nationwide agencies.
- Ask about re-rating. Some insurers will re-evaluate at renewal on request, and some do it automatically at set intervals.
Where it is restricted, insurers rely more heavily on the other rating factors, which are set out in how insurers set your rate. Driving record, claims history and vehicle or property characteristics all carry more weight.
It is one factor among many
Credit is not the only thing, and in many cases not the largest thing. Your driving record, your claims history, continuous coverage, the vehicle or property itself, and where you live all matter. So do the discounts you qualify for and whether you have shopped recently.
Because insurers weight these factors differently, the same consumer can receive very different offers from different insurers. That is the practical argument for gathering your information and going to several markets, as described in how to shop for insurance and captive agents, independent agents and buying direct.
Whether credit information may be used, for which lines, at what stage of the policy, what notices are required and what exceptions apply all vary by state and by insurer, and state law and each insurer's filed rules control. For your own situation, speak with a licensed agent or your state's Department of Insurance. You can also request auto insurance quotes or request home insurance quotes and get connected with licensed providers in your area.