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Consumer Alert

Credit Scoring: How Does it Affect You?

Contact: Mike Bownes, General Counsel

(334)241-4120

8/2/2002

If you are shopping for auto or homeowners insurance, or if your current policy is up for renewal, your insurance company may be looking at your credit history. Here are some tips from the Alabama Department of Insurance to help you understand how your credit information may be used and how it may affect your insurance premiums.

  1. What is Credit Scoring?

    A credit score is a snapshot of your credit at one point in time. The credit information from your credit report is put through a mathematical formula (credit scoring model) that assigns weights to the various factors and summarizes your credit information into a three-digit number ranging from zero to 999. Generally, the higher the number, the more financially responsible the consumer.

  2. How is Credit Scoring Used?

    If your insurance company relies on credit scoring, they may use it in two ways:

    • Underwriting — Deciding whether to issue you a new policy or to renew your existing policy.

    • Rating — Deciding what price to charge you for your insurance by placing you into a specific rating “tier” or level.

    Some insurers use credit information along with other more traditional rating factors, such as motor vehicle records and claims history. Other insurers may use credit alone to determine your rate. Insurance rates based on credit information can vary from company to company, so if you feel your rate is too high, shop around.

  3. What Affects a Credit Score?

    There are several factors that determine credit scores. Each factor is assigned a weighted number that, when applied to your specific credit information and added together, equals your final three-digit score. Following is a list of common factors:

    • Major negative items — Bankruptcy, collections, foreclosures, liens, charge-offs, etc.

    • Past payment history — Number and frequency of late payments.

    • Length of credit history — Amount of time you’ve been in the credit system.

    • Homeownership — Whether you own or rent.

    • Inquiries for credit — Number of times you’ve recently applied for new accounts, including mortgage loans, utility accounts, credit card accounts, etc.

    • Number of open credit lines — Number of major credit cards, department store credit cards, etc., that you’ve actually opened.

    • Type of credit in use — Major credit cards, store credit cards, finance company loans, etc.

    • Outstanding debt — How much you owe compared to how much credit is available to you.

  4. Know Your Credit History

    There is a good chance your current or prospective insurance company is looking at your credit. Therefore it is a good idea to review your credit history to make sure it’s accurate. Request a copy of your credit history from Equifax at http://www.credit.equifax.com/, Experian at http://www.experian.com/, or Trans Union at http://www.transunion.com/. You can also contact the Federal Trade Commission for consumer brochures on credit at http://www.ftc.gov/.

    The Fair Credit Reporting Act requires an insurance company to tell you if they have taken an “adverse action” against you, in whole or in part, because of your credit report information. If your company tells you that you have been adversely affected, they must also tell you the name of the national credit bureau that supplied the information so that you can get a free copy of your credit report and correct any errors.

  5. Take Charge of Your Credit History

    If your insurance company is using your credit score to evaluate your rates, you can take steps to improve your premiums.

    • Get a copy of your credit report and correct any errors. Notify your insurance agent and company of any errors.

    • Improve your credit history if you’ve had past credit problems. If your credit score is causing you to pay higher premiums, ask your insurer if they will re-evaluate you when your credit improves.

  6. Get More Information

    If you have any questions about credit scoring or other insurance-related inquiries contact the department or visit our website at http://www.aldoi.gov/ for more information.

While it appears that Alabama Insurance statutes do not prohibit credit scoring, and while there is some evidence that demonstrates the correlation between losses and bad credit, the Department is in the process of promulgating a regulation to implement safeguards in the use of credit scoring in underwriting and rating. The regulation will ensure that credit scoring is used uniformly and never in a discriminatory fashion. Among other things, it will prohibit credit scoring’s use during renewal of coverage and as a reason for cancellation. The Department hopes to have the draft regulation completed in the next two weeks and a public hearing in early September.

If anyone would like a copy of the regulation to review and/or comment please notify the Department.