Insurance Institute of Michigan
November 19, 2018

What’s Credit Got to do With It?

Why insurance companies use credit
How the use of credit benefits consumers
FAQs about credit
How to get your credit report
Links for further information

Why insurance companies use credit

To make fair and objective decisions and pricing more accurate, insurance companies need to have as much information as possible. Credit history provides a consistent and effective tool to evaluate risk that does not discriminate against any specific group of customers.

Combined with familiar factors such as years of driving experience, previous accidents, type of car or home, where you live and drive and whether you have an alarm system, credit-based insurance scores allow insurance companies to differentiate between lower and higher insurance risks.

Research has shown that consumers with better insurance scores generally have fewer losses and file less expensive claims. People who use credit wisely are generally responsible in other areas of their lives.

In Michigan, insurance companies can only provide a discount for maintaining good credit. In fact, more than two-thirds of Michigan policyholders do have lower rates because of good credit.

How the use of credit benefits consumers

The use of credit-based insurance scores in Michigan actually allows insurance companies to offer lower rates by providing discounts to consumers who have proven to manage their assets well.

People less likely to file a claim in the future pay less, those more likely to have a loss pay more. The same is true for all rating criteria. The alternative would be to charge everyone the same, which means good drivers would pay for bad ones.

The use of credit information promotes competition. This benefits consumers, who can shop around for the best price, service and coverage.

FAQs about credit:

  1. What does a person’s credit have to do with home and auto insurance?
    Independent studies have proven a strong connection between credit history and the likelihood of an individual filing a claim.  People who use credit wisely are generally responsible in other areas of their lives.  Research indicates that people with better insurance scores have fewer losses and less expensive claims.
  2. Why do insurance companies use credit in its decision making?
    To make fair and objective underwriting decisions, insurance companies need to have as much information as possible.  Credit history provides a consistent and effective tool to evaluate risk that does not discriminate against any specific group of customers.  Information such as a person’s age, income, ethnic group, religion, gender or marital status is not factored into credit-based insurance scores. 
  3. Why don’t insurance companies just look at my driving record or claims history?
    Most people think that insurance companies can obtain all the information they need from state motor vehicle departments.  However, a recent study by the Insurance Research Council (IRC) indicated that one in five traffic violations may not appear on a Motor Vehicle Record (MVR) Credit information is generally more accurate and compliments driving history to work to the advantage of most policyholders. 
  4. How does the use of credit benefit insurance consumers?
    The use of insurance scores actually allows insurance companies to offer lower rates by providing discounts to consumers who have proven to manage their assets well.  Two-thirds of policyholders have a lower premium because of good credit.  It also promotes competition, which is good for consumers.
  5. What is an insurance score? And how does it differ from a credit score?
    Insurance scores are different from credit scores or reports.  Insurance companies develop insurance scores from credit history contained in credit bureau reports and use the information when making rating decisions.  An insurance score provides a numeric assessment of an individual’s credit risk.  It reflects credit payment patterns, outstanding debt, length of credit history, types of credit and number of new applications for credit.  Insurance companies consider only those items from credit reports that are relevant to insurance loss potential.  Unlike a lender, an insurance company is not assessing a customer’s income and debt, they are evaluating how customers manage their assets and credit granted to them.
  6. Can I be denied insurance based on my credit?
    In Michigan, state law prohibits consumers from being refused insurance based on their credit information.  Insurance companies here may, however, use credit information in their premium rating decisions.
  7. How is my privacy protected?
    Access to specific credit information is very limited.  Most insurance companies only see the score, not the information that went into developing it.  All companies must follow the Fair Credit Reporting Act and state laws that apply to the use of credit information.  These measures ensure there is confidentiality, accuracy and a legitimate need for the information.
  8. Are insurance scores reliable?
    The Consumer Data Industry Association reports that less than 1 percent of all credit report challenges result in a change once the inquiry has been fully investigated. 
  9. How can I find out about my insurance score?
    The use of credit information is not secret.  Every existing and potential policyholder deserves to know how a company uses credit information.  If you don’t feel your agent or company is telling you what you need to know, shop around for another agent or company that will.
  10. What can I do to improve my score?
    Consumers can improve their insurance scores over time by using credit responsibly.  Make sure you pay bills on time, keep balances low and apply for and open new credit accounts only as needed.

How to get your credit report

Credit reports are generally very accurate; however, mistakes do happen.  If a consumer discovers an error on their report, all they need to do is contact the reporting agency to have it corrected.  To make sure that your credit report is accurate, review it from each bureau at least once a year. Credit reports are available free once a year by visiting, www.annualcreditreport.com or calling 1-877-322-8228. The three credit bureaus follow:

To find out more information about credit-based insurance scoring, visit the following sites:

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