A late credit card payment can result in not only higher APR on that credit card in the future, a late payment and other fees, but it could also prevent you from acquiring insurance.
We’ve known for some time now that insurance companies have looked to our credit scores and history as a way of gauging how much our policies would cost us. Now, those same companies are looking to those reports to determine if it will even offer a policy at all. A new report shows that many personal auto and homeowners insurance companies are first looking to consumer credit files to determine whether to issue or renew an insurance policy at all and if so, only then does it use the numbers to determine how much premiums they will demand.
Here’s what we found from the FTC.
Fair Credit Reporting Act
First, Fair Credit Reporting Acts, both on federal and state levels, allow insurance companies to look at your credit information without your permission. If they’re reviewing applications and the information provided via the applications, they can incorporate standard credit checks to decide if they want to insure you. They must inform you first that they will be using information obtained from your credit history to determine your worthiness as an applicant. This is legal courtesy of the Federal Fair Credit Reporting Act and your applicable state Fair Credit Reporting Act. And by the way – if you’d like to review that law, you can do so here: http://www.ftc.gov/.
The reason this kind of information is allowed is simple: insurance companies insist that the information found in a consumer’s credit file will predict who is more likely to file insurance claims. They believe that consumers who are more likely to file claims should pay more for their insurance. Therefore, insurers can use your credit history to underwrite your insurance policy, to rate your insurance policy or approve your application for an insurance policy. This process is known as “underwriting” and it’s the information gathering stage where these questions are answered for the issuing company.
In some states, an insurer is prohibited from denying, canceling or refusing to renew either an auto or homeowners policy based solely on your credit information. You should know, however, that many insurers are making efforts to change that. Also, some states are also prohibited from allowing insurance companies to base renewal rates on the credit information alone. They must consider your past history with that insurance company and only that insurance company, claims filed, the distances to fire and police departments, hospitals and others and whether or not a teen has been added to an auto policy.
Also – remember that the insurance company may pull a credit report of everyone included on your policy. Your husband, wife, children – they may not, but they can if they choose to. Consumers are encouraged to speak with their agent to determine whether credit information is used for either the underwriting or the rating of your policy. If credit history is used for rating, ask him how it affects your insurance premium. Don’t forget to inquire as to whether it pulls credit histories on everyone in the policy. Your state may have different laws, so you’ll want to be sure your insurance company is in compliance with those state laws.
Another trend has emerged in recent years. Some companies may try to penalize an applicant for not having a credit history at all. Each state law is different and the insurance company must be compliance not only with federal laws, but state laws too. Most companies won’t penalize an insured for the absence of a credit score (even though trends suggest efforts of changing that are being made); however, a company may have filed information that justifies its belief that the lack of credit information or inability to reach a score is a relevant underwriting or rating factor. If the filing has been approved, the company may use this information to determine premiums. Younger consumers, of course, are more likely to not have a credit history. Others are sure they do have a history but the insurance company is unable to find it. Consumers are encouraged to contact the three credit bureaus to request a copy of their credit report so that they can see for themselves.
Here’s where things can get confusing. Most companies that use credit information use an “insurance credit score”. An insurance credit score is calculated using different variables from your credit history. For instance, some insurance credit scores are determined by using recent credit history more heavily than old credit history. There are other factors too that insurance companies may consider, including bankruptcy filings, foreclosures, credit card payments, late payments, auto repossessions, how long an applicant has had credit, recent inquiries and whether or not there are several newer credit accounts. All of these or a combination of some of them are used, which makes it important that you understand what variables your own insurer will use. Unfortunately, there are no industry standards.
Keep in mind, too, that there are other factors besides an applicant’s credit scores that are used. For instance, your auto premiums are based on things like your driving record. A homeowner’s policy is determined by factors such as where you live in relation to a fire station.
Don’t Ask Me
Finally, your agent will likely not know what your scores are or why your application was declined. You should still receive notification from the company itself with an explanation. It can tell you a lot about why you were denied. Just like any other creditor must provide information, your insurance company must also provide that information. The reasons provided must be specific so that you are able to understand why you were declined. The insurance company must provide the name, address, and telephone number of the consumer reporting agency that supplied the information. Also, the FCRA requires an insurer to contact a consumer any time an ‘adverse action’ results in changes in your policy as well as denying or cancellations. Any kind of change at all – whether it’s a new surcharge or limiting your benefits – must be provided in writing.
Carefully read letters from your agent or insurance company, especially if it relates to an increase in premium or a denial or cancellation of your coverage. The FCRA requires an insurance company to tell you if they take an “adverse action” because of your credit information. FCRA defines “adverse action” to include denying or canceling coverage, increasing premiums, or changing the terms, coverage, or amount of coverage in a way that harms the consumer.
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