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Insurance Companies Care About Credit Reports

It's fairly common knowledge that the information contained in your credit report is used to determine your credit worthiness. Lenders and finance companies of all kinds will pull your credit report when you apply for financing for anything from a new set of tires to your dream home. People with good credit get approved easily, and at preferred interest rates. People with a few negative items may struggle to get approved, and end up paying an interest rate of 18% or even higher in some cases.

One of the biggest non-lending industries that currently use your credit reports is the insurance industry

There was a time when a few negative items on your credit report may have meant just paying higher interest rates, or even being denied for credit. As traumatic as being turned down for a new car because of bad credit may be, the information on your credit report may affect your lifestyle in ways you never expected. An increasing number of companies and industries that have nothing to do with credit or financing are looking at your credit reports to determine whether or not to do business with you and what the cost of doing business with them is.

Are non-lenders using your credit against you?

There are many ways in which a non-lender may use the information contained in your credit report. For example, a potential employer may use credit reports to screen potential new hires, although this type of use is carefully regulated to deter discrimination. One of the biggest non-lending industries that currently use your credit reports is the insurance industry, primarily home and auto insurers. Property insurers have been using the information in your credit reports in this way for years without anyone really protesting or much controversy at all. However, a much more questionable use that is exploding in popularity among insurers the last few years, your credit reports have probably been used to determine how much you pay for your car insurance.

Bad Credit = Bad Driver (?)

In a 2001 study by Conning & Co., an insurance-research and asset-management firm, it was found that up to 92% of the largest auto insurance firms used information in credit reports in writing new policies, and as much as 52% used the same information to determine rates as well. Scary? You bet it is. Is it really legal? With a few states being the exception, it is legal to use your credit in the approval process, to help determine your rates, or both. Many states, however, are working to make sure that your credit history cannot be used for insurance purposes. The insurance companies claim that your credit score is a pretty good indicator of the likelihood that you will file a claim. There are plenty of theories about why this is true, but the insurance companies don't really care about the "why," they seem to accept that it's a fact, and that's good enough for them.

Consumer advocates are strongly opposed to this particular use of credit report information, claiming that it opens the door for many other types of discrimination. One of the most vocal opponents, Robert Hunter, is the director of insurance at the Consumer Federation of America. "I don't agree with the whole system," he states, "What's next? Color of hair? Color of eyes? Left-handedness? You can get a statistical connection on a lot of different things, but that doesn't mean you should use it."

Repair your credit, get better rates?

As long as the insurance industry is using the information in your credit reports, you might as well use the fact to your advantage. Generally speaking, the insurance companies use your reports to determine an "insurance score". While it's not exactly the same thing as your credit score, it is very similar. One of the main differences is that your insurance score gives more weight to payment history, while giving less weight to amounts owed. And, it's estimated that a bad credit score could cost you up to 40% more on your premiums. Conversely, repairing your credit reports and having a good credit score could potentially save you up to 40%. How would you like to pay 40% less than you're paying right now for insurance?

While waiting for your state to take action and regulate this type of usage is what most consumers will probably do, there's a lot more that can be done right now. The best solution in the short term is repairing your credit by making sure that there is no inaccurate or potentially damaging information contained in it. Depending on a variety of factors, such as length of credit history and different types of credit, it can take several months to effectively repair your credit reports. The difference is, it may take years for your state to regulate this type of usage, and there's no guarantee that anything will change. Repairing your credit report is the only way to make sure that you won't pay higher rates as a result of the information in your credit file.

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