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Insurance companies are increasingly using auto insurance credit reports to determine auto insurance ratings. The credit scoring system classifies consumers as preferred, average or high-risk class, and this can impact what rate an insurance company charges you.
Where you live determines what information companies can gather and how the information can be used. In states where it is allowed, insurance companies 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, geographical factors for 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 a rate plan – for each insurance consumer.
Many states are required to tell consumers what the top several factors are that affect their auto insurance 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 are interested in finding out if credit was used to determine your auto insurance rates, contact your insurance carrier.
It is a good idea to get your credit checked periodically. If you find errors, you can quickly take steps to fix it before it hurts you. What if you are insured and, and your credit takes a turn for the worse? You will probably be all right. For one thing, companies who know and trust you may be reluctant to (or may not be allowed to) raise your auto insurance rates for no other reason than a credit score. And credit scores generally do not vary dramatically over short periods of time.
Also, insurance companies fall into one of two camps: those that use credit in rating only new business, and those that favor using credit scores in periodic updates and adjustments. About 80 percent of companies fall into the “new business only” category.
Whether or not you support the use of credit in auto insurance rating plans, it is wise to regularly review your credit report. And know your rights – Under the Fair Credit Reporting Act (FCRA), consumers have the legal right to obtain a free credit report if an “adverse action” has been taken as a result of a credit report or score. (The act was passed to hold credit reporting agencies accountable to standards of confidentiality, accuracy and proper use of credit information. For more information on your rights under FCRA, go to www.ftc.gov/os/statutes/fcra.)
