What happens if my home insurance score is poor?

Welcome to the 21st Century and the digital world! Insurance companies now routinely access your credit score, use their own criteria, and develop an insurance score that may or may not affect the company’s underwriting on your home insurance.

Many insurance companies use credit report information as well as other underwriting considerations to decide your acceptability and the rates charged to you as a purchaser of your home insurance policy.

This information may also be used to affect the premiums you pay for home insurance. A full discussion of the uses of credit scores may be found on the Federal Trade Commission’s website. The Federal Trade Commission serves as the government’s watchdog about consumer affairs.

Be sure to use the FREE home insurance quote tool located above!

Is credit-based insurance scoring legal in your state?

Not all states allow the use of credit-based insurance scoring. You can find this out by referring to the insurance department for your state.

The NAIC will steer you to the website for your particular state.

How is a credit scoring system developed?

The insurance company’s actuaries take a random sampling of statistics for customers, then analyzes the data statistically and ascertains what the chances are that customers with these statistics are likely to submit claims under their home insurance policy.

There is generally no set way of determining what model an insurance company uses. However, under the Equal Credit Opportunity Act, the company is forbidden to use such things as:

• Race, color, national origin
• Religion
• Gender
• Marital status
• Age
• Income, employment history, or occupation
• Residence location
• Interest rate of any loan
• Child support, family obligations, or rental agreements

Note that this has not always been true. Before this act took effect, individuals who were divorced often considered a dubious risk as were many of the other prohibited areas.

Information Used to Establish Credit Scores

When figuring credit scores, insurance companies and credit companies often use the following to assess credit-worthiness:

• Are bills paid on time? This is a significant factor because paying bills late, had accounts sent to collection, or declared bankruptcy can adversely affect your credit score.
• Have you maxed out your credit limits? Credit companies look at the ratio of debt to available credit to determine decisions on credit. If you have used all the available credit you have, it may negatively affect your score.
• How long have you had credit? Records are kept of how long you’ve had credit, and when you applied for additional credit are kept, and a great many applications can negatively affect your score.
• How many credit accounts do you have and what do they represent? Too many credit card accounts can negatively affect your score. Some credit companies attach a negative effect on your record for loans from finance companies.

Are insurance scores fair?

The Federal Trade Commission did a study in 2007 and found that there is a definite connection between insurance scores and the likelihood of filing a claim.

Since each insurance company uses different portions of credit scores to help determine their formula, getting quotations from several different insurance companies will help you get the lowest price for your home insurance.

What parts of credit scores are used to determine an insurance score?

Since the portions of your credit score that are used to determine insurance scores vary from company to company, it’s hard to say.

Again, this is an excellent reason for obtaining quotations from several different companies.

If you are concerned that numerous credit checks from insurance companies may affect your overall credit score, don’t worry.

Insurance queries are regarded as “soft” queries and are not considered part of your over-all credit rating.

On the other hand, conventional credit scores do not take into consideration past insurance claims.

An insurance score reflects the number of claims filed.

Many claims can adversely affect your insurance score.

Obviously, there’s nothing you can do about weather-related losses, but a multiplicity of minor claims are scrutinized carefully.

Improving Your Credit-based Insurance Score

Many of the strategies used to improve your credit rating also can be used to increase your insurance score. Do the following:

• Make payments on time
• Pay your bills, taxes, and any fines or fees as agreed
• If you’re behind on payments, catch up on them and remain current
• Maintain low balances on your credit cards and accounts

CLUE Insurance Report

Specialized insurance statistics are kept by the insurance industry under the acronym, CLUE, for Comprehensive Loss Underwriting Exchange.

Insurance companies have access to this report generated by LexisNexis®, a consumer-reporting agency. Insurance companies report claims for which they:

• Pay out money
• Set up a file for a possible claim
• Formally deny a claim

The following information is recorded:

• Name of the claimant
• Date of birth
• Policy number
• Date of loss
• Type of loss
• Amount the company paid
• Description of the covered property
• Property address for a homeowners claim or specific description of vehicle for auto claims

The insurance company can request a CLUE report if you apply for insurance or request a quote for insurance. Under the Fair Credit Reporting Act, you are entitled to a copy of this report annually. You can request this from LexisNexis®.

If you are denied credit or insurance due to a credit score, you are entitled to receive a notice indicating the source of the information that affected their decision.

However, only the insurance company can inform you of the reason for the decision.

Cautions to Observe When Purchasing Insurance Online

Make sure the company and agent are licensed to sell insurance within your state.

Do the following:

• Contact your state’s insurance commissioner to determine licensing
• Obtain the complaint records for the insurance company for which you request quotes.
• Protect your personal information – if you have any doubts about security – submit your application for quotes by U.S. Mail.

Advantages and Disadvantages of Credit Reports

Credit reports are necessary to ensure the fair application of insurance premiums based upon actual data. This represents the major advantage of a credit report-based premium. Your premiums can be reduced in this manner.

On the other hand, a credit report ensures that individuals who have had claims are held accountable for both their credit history and claims history for insurance purposes.

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