Auto Insurers Base Rates on Credit History

A growing number of companies - many of them having nothing to do with the business of offering credit - are also scrutinizing the data on credit reports to decide whether to do business with you, and how much to charge.

Some non-lenders have been using credit information in this way for years. Many property insurers, for example, rely on them to help set rates for homeowners' insurance. Employers also use credit data to screen potential new hires.

But there's one industry in which the use of credit reports has been exploding in the last few years, auto insurance.

As many as 92% of the 100 largest personal automobile insurers use credit information to underwrite new business, according to a 2001 study by Conning & Co., an insurance-research and asset-management firm. At the time of the survey, more than half of this group had started using the data within just the past three years. And 52% of the companies used credit history not just to decide whether to insure you, but also to help determine the rates charged.

The figure insurers use to evaluate you based on your credit history is called your "insurance score." Insurance scores are used to help insurers differentiate between lower and higher insurance risks and thus charge a premium equal to the risk they are assuming. Statistically, people who have a poor insurance score are more likely to file a claim. Similar to a credit score, an insurance score generally gives a greater weighting to factors such as whether you've paid your bills on time, and for how long you've done so. At the same time, less weighting is given to the amount you owe. How much your insurance score matters depends on the insurance company you use as well as where you live, since insurance is regulated at the state level.

Employers Can Conduct Credit Checks

A poor credit report might also cost you a job. According to a 2004 survey by the Society for Human Resource Management, 19% of employers always and 24% sometimes conduct credit checks on employees before hiring them. The credit report is often simply used to verify information on your application, such as where you have lived and whom you worked for. But in some cases, it's used to get a glimpse of the way you handle your finances. However, it’s important to note that the Fair Credit Reporting Act requires employers to get your permission before they pull your report.

Considering all the uses to which your credit report can be put, it's more important than ever that you review your report once a year. As many as 79% all credit reports contain errors 29% of which are serious enough to cause the denial of credit, according to a 2004 report by the Public Interest Research Group, or PIRG.

Contributing Sources: iii.org and USA Today

Insurers and Employers increasingly rely on your credit scores to set your rates and determine whether or not to hire you. Correcting errors and inaccuracies on your credit report is becoming more and more critical to every aspect of your life. Click on the link to see how CreditLawGroup can help.