If you are shopping for auto or homeowner's insurance or if your current policy is up for renewal, chances are the company may be looking at your credit history.

Questions and answers:

Is it legal for an insurance company to receive general credit information without my permission?

Yes. A federal law, the Fair Credit Reporting Act (FCRA), states that insurance companies have a "permissible purpose" to receive general credit information that does not identify your relationship or experience with a particular creditor without your permission. Insurance companies must also comply with state insurance laws when using credit information in the underwriting and rating process.

Why are some insurance companies using credit information?

Some insurance companies believe there is a direct statistical relationship between financial stability and losses. They believe that, as a group, consumers who show more financial responsibility have fewer and less costly losses and, therefore, should pay less for their insurance. Conversely, they believe that, as a group, consumers who show less financial responsibility have more and costlier losses and, therefore, should pay more for their insurance.

Does using credit information discriminate against lower-income consumers?

Insurers that use credit and entities that have developed credit scoring models state that there is no difference in credit scores among different income levels because there are just as many financially responsible low-income consumers as there are financially responsible high-income consumers. In addition, those companies warrant that factors such as income, gender, marital status, religion, nationality, age, and location of property are not used in their credit scoring models.

What kind of credit information are insurance companies using?

Although some insurance companies still look at your actual credit report, most companies that use credit information are using a "credit score," sometimes called an "insurance score." 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 000 to 999, depending on the insurance company and the credit scoring model they use. Generally, the higher the number, the more financially responsible the consumer.

How are insurance companies using credit?

Companies are using credit in two ways:

Underwriting - deciding whether to issue you a new policy or to renew your existing policy. Some states have made it illegal to refuse the issuance of a renewal policy based solely are credit scoring.

Rating - deciding what price to charge you for your insurance, either by placing you into a specific rating "tier" or level or by placing you into a specific company within their group of companies. Some insurers use credit information along with other more traditional rating factors such as motor vehicle records and claims history. Other insurers use credit alone to determine your rate. Some states have inacted laws to prohibit this practice.

Often, the term "underwriting" is considered to include rating.

How do I know if an insurance company is looking at my credit?

Some producers and companies will ask for your Social Security number to obtain "consumer information," "background information," or an "insurance bureau/credit score." When an application for insurance is submitted, consumers should ask their insurance producer or company about whether and how credit information will be used in the underwriting and rating process.

Will having no credit history affect my insurance purchase?

Possibly. Sometimes an insurer will find "no hits" or "no score," which means they cannot find a meaningful credit history for you. This lack of credit information could occur if you are young and have not yet established a credit history; if you do not believe in using credit and have always paid in cash; or if you have recently become widowed or single and all of your previous credit information was in your spouse's name.

If an insurance company finds no meaningful credit information for you, you may pay a higher rate for insurance. Although many companies will not charge you their highest rate, neither will they give you their best rate. If you know that you have an established credit history, check with your producer or insurance company to make sure they are using your correct Social Security number, birth date, or other information to find your records.

What parts of my credit information are companies using?

Insurance companies and entities that have developed credit scoring models use several factors to 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 the more common factors used:

Major negative items - bankruptcy, collections, foreclosures, liens, charge-offs, etc.

Past payment history - number and frequency of late payments; days elapsed between due date and late payment date.

Length of credit history - amount of time you have been in the credit system.

Home ownership - whether you own or rent.

Inquiries for credit - number of times you have recently applied for new accounts, including mortgage loans, utility accounts, credit card accounts, etc.

Number of credit lines open - number of major credit cards, department store credit cards, etc. that you have 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.

What do insurance companies consider a good credit score?

A "good" score varies among companies. A good score is a number that matches the level of risk your insurance company is willing to accept for a particular premium. For one company, a 750 score may qualify you for their best (lowest) rate. For another company, the same 750 may not be high enough to qualify you for their best (lowest) rate.

Must a producer or company tell me what my credit score is?

No. In fact, the producer or company underwriter might not even know your actual credit score. Instead, the credit scoring company or model they use may just advise that your score qualifies you for a particular tier or company within the group.

Even if you know your credit score, it may not be useful to you. Since a score is just a snapshot of your credit information on a particular day, your score could change at any time there is a change in your credit activity or a creditor's report to a credit bureau. In addition, insurance companies use different credit scoring models, so your score could vary from one insurer to another. For example, one company may use three scoring factors (bankruptcies, judgments, and liens) and assign certain weights/points to each. Another company may use those same three factors but assign them different weights/points, and use two additional factors such as payment history and outstanding debt.

Lastly, since the national credit bureaus do not share information with one another, a score may change depending on which of the three national credit bureaus report the information that goes into the scoring model.

If I do not know my score, and my score varies from company to company and day to day, how will I know if my credit is affecting my insurance purchases?

The FCRA 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. It is important to note that insurance companies vary in what constitutes an "adverse action." Examples include giving the consumer a limited coverage form, not giving the consumer the best rate, not giving the consumer a discount, or giving the consumer a surcharge. In addition, insurance companies differ in how and when they notify consumers about an adverse action. For example, notification could come either verbally or in writing from either the producer or the insurance company, and notification could come at the first policy period or at each renewal. The best way to know for sure if your credit score is affecting your acceptance with an insurer for the best policy at the best rate is to ask.