Credit information derived from customers' credit reports is only one of many factors that American Family Insurance Company considers when pricing a risk. Credit information has been proven to effectively predict the likelihood of future insurance claims. We're finding that our use of credit information allows us to offer lower premiums to many customers who otherwise would pay more for their insurance.
During the past several years, insurance companies have increasingly used credit information as a factor to price and evaluate insurance policies. For an overview about how American Family Insurance uses credit information, please refer to the frequently asked questions below.
- What is a credit-based insurance score?
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A credit-based insurance score is a numerical “snapshot” of your insurance risk at a particular point in time and reflects credit management patterns such as collection, length of credit history, types of credit in use and the number of new applications for credit. Along with motor vehicle records, loss reports and application information, it helps an insurer decide: If we accept this applicant or renew this policy, are we likely to be exposed to more losses than our collected premiums allow us to handle? A higher credit-based insurance score indicates lower risk to an insurer.
A credit-based insurance score provides insurers with a fast, objective measurement of your insurance risk based solely on information in your credit report. When you apply for insurance or renew your insurance policy, your insurer may send a request to one of the national credit reporting agencies (Equifax, Experian and TransUnion) to run a credit-based insurance score. The credit bureau then uses Fair Isaac's software to calculate a credit-based insurance score from your credit bureau report. Once this score is calculated, it is returned to your insurer.
Credit-based insurance scores developed by Fair Isaac are also known by their product names as:
• InScore® (at Equifax)
• The Experian/Fair Isaac Risk Model (at Experian)
• Fair Isaac ® Insurance Risk Score (at TransUnion, formerly known as ASSIST Scores)Although Fair Isaac develops the software used to generate credit-based insurance scores, Fair Isaac does not calculate consumer credit-based insurance scores or have access to them. Fair Isaac also does not maintain consumer credit file information.
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- What is the difference between a credit-based insurance score and a credit score?
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A credit-based insurance score is used by insurance companies and is derived from information in a consumer's credit report. It is a predictor of how likely a consumer is to file insurance claims. This score can be used to help insurers decide how much premium they need to charge to cover the risk a particular consumer represents.
A credit score , on the other hand, is used by lending institutions and is also derived from information in a consumer's credit report. It indicates how likely a consumer is to repay a loan. Banks and other lenders use this score to help them decide whether to give a customer a loan and what interest rate they should charge.
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- Why is my credit-based insurance score different from my credit score?
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Credit-based insurance scores predict future insurance risk; credit scores predict future credit risk. Since each score is predicting a different event, the credit characteristics and their correlation to each risk, is different. In addition to this difference, credit-based insurance scores are not developed to coincide with credit scores. Even though both have similar score ranges, they are not meant to be comparable or related.
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- What is in my credit report?
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Although each credit reporting agency formats and reports this information differently, all credit reports contain basically the same categories of information. These include:
• Identifying Information: Your name, address, Social Security number, date of birth, and employment information are used to identify you. These factors are not used in credit-based scoring. Updates to this information come from information you supply to lenders.
• Trade Lines: These are your credit accounts. Lenders report on each account you have established with them. They report the type of account (bankcard, auto loan, mortgage, etc.), the date you opened the account, your credit limit or loan amount, the account balance and your payment history.
• Inquiries: The inquiries section contains a list of everyone who accessed your credit report within the last two years. The report you see lists both voluntary inquiries, spurred by your own requests for credit, and involuntary inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.
• Public Record and Collection Items: Credit reporting agencies also collect public record information from state and county courts, and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens and judgments.
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- What does my credit history have to do with insurance?
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There is a very strong connection between insurance and credit history. For instance, credit history can help an insurer:
• Accurately predict a customer's likelihood of filing insurance claims.
• Enhance the precision and fairness with which coverage costs are determined based on each customer's potential for filing future claims.
Research shows people with certain patterns of behavior in their credit history are more likely to result in losses for the insurance company. While having a good insurance score does not necessarily mean a policyholder is a good driver or a more responsible homeowner, research shows that those individuals generally file fewer and/or less expensive claims.
Credit-based insurance scores give insurers an objective measurement of insurance risk. Before the use of scoring, the insurance granting process could be slow, inconsistent and unfairly biased. Scores help insurers control insurance losses, and makes insurance granting processes faster and more efficient. Insurers can pass these savings on to policyholders by lowering insurance rates. In addition, scores help insurers to design and price products for various market segments, ultimately extending insurance to more people. The use of credit information may allow certain customers to benefit in lowered premiums.
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- What personal information impacts my credit-based insurance score?
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Only credit-related information is used in determining a score. Credit-based insurance scores give insurers an objective measurement of your insurance risk. Before the use of scoring, the insurance granting process could be slow, inconsistent and unfairly biased. Credit-based insurance scoring does not consider your race, gender, age, income, nationality, religious affiliation, or marital status as it is prohibited by the Equal Credit Opportunity Act.
A credit-based insurance score only takes into consideration the credit-related information on your credit report. That is what makes credit-based insurance scoring so useful—its ability to quickly, fairly and consistently consider activities from your credit report. No one piece of information will determine your ultimate credit-based insurance score. Poor credit performance will not haunt you forever. Past credit problems fade as time passes and as recent good payment patterns show up on your credit report.
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- Do I have any rights if I pay a higher premium based on my credit history?
- What do I do if the credit report is wrong?
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Insurers cannot correct data at the credit reporting agencies. If you find an error on your credit bureau report, contact the credit reporting agency that developed the report. If you are in the process of applying for insurance, immediately contact your insurer to let them know that there may be an error on your report.
To request a copy of your credit report, contact the credit reporting agencies directly:
• Equifax: (800) 685-1111, www.Equifax.com
• Experian: (888) 397-3742, www.Experian.com
• TransUnion: (800) 888-4213, www.TransUnion.com
After you have contacted the credit reporting agency and received a copy of your credit report, if you discover a mistake, contact them directly and notify them of any discrepancy. Once the credit reporting agency investigates and updates their records, we will be notified and may re-evaluate your quote or policy based on the corrected information.
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- How long does it take to correct discrepancies in my report?
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The Fair Credit Reporting Act (FCRA) allows the credit reporting agency a "reasonable period of time," generally not to exceed 30 days, to reinvestigate consumer-disputed items. Small errors may have little or no effect on your credit-based insurance score. If there are significant errors, the insurer may disregard the score, or may reorder your credit report and your credit-based insurance score. Only the credit reporting agencies have the data from which credit-based insurance scores are calculated.
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- How can I improve my credit-based insurance score?
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Improving your score will take time and often there is no quick fix. Credit-based insurance scores reflect credit payment patterns over time with more emphasis on recent information. There is no mystery about how people can improve their credit-based insurance scores. That means showing a historical pattern of paying your bills on time and using credit conservatively.
Here are some general tips all consumers should follow:
Do:
• Pay your bills on time. Delinquent payments and collections can have a major negative impact on your credit-based insurance score.
• If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your credit-based insurance score.
• Keep balances low on credit cards and other revolving credit. High outstanding debt can affect a credit-based insurance score.
• Pay off debt rather than move it around. The most effective way to improve your credit-based insurance score in this area is by paying down your revolving credit.
• Note that it's OK to request and check your own credit report. This won't affect your credit-based insurance score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.
• Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix—it probably won't raise your credit-based insurance score.
• Do your rate shopping for a loan within a focused period of time. Credit-based insurance scores distinguish between a search for a mortgage or auto loan (where it is customary to shop for the best rate), and a search for many new credit lines.
Don't:
• Don't close unused credit cards as a short-term strategy to raise your credit-based insurance score.
• Don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower your credit-based insurance score.
• If you have been managing credit for a short time, don't open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a greater effect on your credit-based insurance score if you don't have a lot of other credit information. Also, rapid account build-up can look risky if you are a new credit user.
Be aware that:
• Paying off collection accounts or other derogatory items will not remove them from your credit report. The fact that this event occurred is predictive, in addition to any dollar amount associated with the past due.
• Closing an account will not remove it from your credit report and may not improve your score. For suggestions on how to improve your credit information, visit TransUnion's website at transunion.com.
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- What is an inquiry?
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An inquiry is a notation on your credit report showing that someone asked to view your report. The inquiries section contains a list of everyone who accessed your credit report within the last two years. It says who asked for the copy, when they received it and their address.
Your credit report includes two types of inquiries. It includes voluntary inquiries, spurred by your own requests for credit. For example, when you apply for a loan, you authorize your lender to ask for a copy of your credit report. Your report may also include involuntary inquires, known as “soft” inquiries, such as when lenders check to see which consumers may qualify for their pre-approved credit offer in the mail. Only voluntary non-insurance inquiries may be included (as specified by state law) in the calculation of credit-based insurance scores. “Soft” Inquiries of the following types are excluded from score calculation:
• Consumer disclosure inquiries-requests you have made for your credit report to check it.
• Promotional inquiries-requests made by lenders in order to make you a “pre-approved” credit offer.
• Administrative inquiries-requests made by lenders to review your account with them.
• Employment inquiries-requests that are marked as coming from employers.
• Insurance inquiries-requests made by insurance companies for your credit-based insurance score or credit report.
• Collection inquiries-requests that are marked as coming from collection agencies.
• Government non-loan inquiries–requests that are marked as coming from the government that are not related to a loan program.
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Additional Information
American Family Insurance offers a brochure for you to download1 and read at your convenience.
Credit-Based Insurance Scoring Brochure (288KB)
1Adobe Acrobat Reader is needed to open this PDF file. If you need assistance with Adobe Acrobat Reader, please go to Adobe's Customer Support page. American Family Insurance is not liable for any direct or indirect technical or system issues or consequences from your use of third-party technologies or programs accessible through our site.
