Guess Who's Looking at Your Credit Report

WE ALL KNOW that folks with lousy credit have a harder time obtaining loans. And that seems reasonable, right? After all, who wants to lend money to someone with a poor record of paying it back on time?

But these days, having some black marks on your credit report may mean more than paying a higher interest rate on your credit card. A growing number of companies — many of them having nothing to do with the business of offering credit — are also scrutinizing the data on those reports to decide whether to do business with you, and how much to charge.

Some nonlenders 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, a practice that is relatively noncontroversial. And one potentially troubling use of credit data — by employers to screen potential new hires — has been sharply constrained by legislation.

But there's one industry in which the use of credit reports has been exploding in the last few years, and it's a business in which the pertinence of credit data seems tenuous at best: 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.

Does Bad Credit Make Bad Drivers?
Many insurance companies argue that a credit report can be a good indicator of the likelihood that a policy holder will file an auto-insurance claim. Some even say that in some cases what's on your credit report can be more important than what's on your driving record, according to the Conning study.

"We know that there is a correlation between how someone manages their credit and insurance losses," says Mike Trevino, spokesman for Allstate, the second-largest auto-insurance provider in the country. But what's not altogether clear is why. "We're not sure," admits Trevino. "But we know it's a fact.... And for us, that's what's most important."

There are some theories. Someone having financial problems could be under more stress, which could lead to more accidents, explains Clarence Smith of Conning's insurance-research division. Others theorize that someone who handles personal finances well is likely to be conscientious about other aspects of life, including driving and car maintenance.

But some consumer groups aren't buying it. "I don't agree with the whole system," fumes Robert Hunter, director of insurance at the Consumer Federation of America. "What's next? Color of hair? Color of eyes? Left-handedness? You can get a statistical connection on a lot of different things, but that doesn't mean you should use it."

The figure insurers use to evaluate you based on your credit history is called your "insurance score." This is similar to (although not exactly the same as) a credit score. Compared 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. For $12.95 you can pull your insurance score plus a copy of your credit report at, a Web site run by ChoicePoint, a firm that calculates insurance scores for many companies. Of course, many of the big insurance companies use proprietary scoring systems, but generally speaking, if you have a good score with the version made available to the public, you should be in good standing with most insurance companies, says Jeffrey Skelton, assistant vice president of personal insurance at ChoicePoint.

Of course, just how much your insurance score matters depends on where you live, since insurance is regulated at the state level. California, for example, doesn't allow credit history to be used for insurance purposes and many other states are scrambling to follow suit. Nevertheless, most still states do. Some allow it to be used for the approval process, while others allow it to determine what rate class you fall into. Some allow both.

How heavily your insurance score will be weighed also depends on the insurance company you use. At Farmers Insurance, for example, a poor credit history could cost you 35% to 40% more in premiums, depending on the state in which you live, according to Greg Ciezadlo, vice president of auto-product management. Chubb, on the other hand, doesn't use credit data at all.

And while insurance companies say that a poor insurance score alone shouldn't be enough to deny you coverage, that may not always be the case, according to Gerri Detweiler, author of "The Ultimate Credit Handbook." Detweiler recently wrote a consumer pamphlet on insurance scores for, an online debt-management service. During her research she came across a 1999 study of insurance agents and companies in Virginia that stated that 16% of new applicants were denied coverage because of poor credit, while 19% of policies were not renewed for the same reason. "What really troubles me is that if you have unusual circumstances or go through tough times, that could cost you in many, many ways," Detweiler says. "And that's scary for the average consumer."

Reckless Homeowners?
And what about those other ways spotty credit could hurt you? True, it's somewhat easier to see a correlation between poor credit and property-insurance claims. For example, someone under financial duress might be tempted to claim the "loss" of a valuable possession. (Doing so is also, of course, fraud.)

But if the idea of using credit reports to underwrite homeowners' policies still troubles you, you better get used to it. These are tough times for property insurers, who are being squeezed by rising claims and shrinking investment income. As a result, premiums for homeowners' insurance are expected to soar this year — perhaps by more than 10%. And the same difficult environment could also lead more insurance companies to use credit data to price policies. Farmers, for example, is planning to expand its use of a specific credit-based homeowner's insurance score, which is a slightly different score than the one it uses for auto insurance.

In a more extreme scenario, a poor credit report might cost you a job. As many as 42% of employers do credit checks on employees before hiring them, according to a 1998 survey by the Society for Human Resource Management. 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 glimpse of the way you handle your finances. "There's an assumption that people with poor credit histories are more likely to steal," says Lynn Nemser, president of Partners for Performance, a small human-resources and management consulting firm. "That's a big assumption.... I don't know if there's anything to substantiate that."

Thanks to the Fair Credit Reporting Act, employers are restricted in their uses of credit checks. For starters, they need to get your permission before they pull your report, explains Peggy Twohig, assistant director for financial practices at the Federal Trade Commission. And if they choose not to hire you based on what's contained in the report, they have to tell you. Given these restrictions, "pre-employment credit checks are not as prominent in employment searches as they used to be," says James Lee, vice president of marketing and communication at ChoicePoint, which in addition to providing insurance scores is the largest pre-employment background-screening company in the country.

Still, considering all the uses to which your credit report can be put, it's all the more important that you follow the standard-issue financial planner's advice, and review that report once a year. Fact is, as many as 79% all credit reports contain errors — 25% of which are serious enough to cause the denial of credit, according to a 2004 report by the Public Interest Research Group, or PIRG.

And that's all the more troubling in light of the increasing impact a bad credit report can have, says Ed Mierzwinski, director of PIRG's consumer program. "It's outrageous that the credit bureaus are claiming that their scores are accurate enough to take people's lives and screw with them like this."




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