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Credit Scoring Auto Insurance Premiums & Helpful Resources
We present here a collection of information and suggestions regarding the use of credit scoring as the foundation of one's insurance score. The purpose here is to broaden the consumer base of knowledge on the topic of credit scoring in determining both availability and pricing of insurance products.
OUTLINE OF TOPIC:
1. Introduction to Use of Credit Scoring for insurance availability and pricing
2. What is a "credit score" and "FICO score"? Who are TransUnion, Experian and Equifax and ChoicePoint—and how do they differ? Who is "Fair Isaac" and is he really "fair"?
3. FICO INSURANCE SCORE MODEL: What is in an insurance score?
4.ChoicePoint Factors Used to Create Insurance Scores
5. Background Reading and Resources: Learn About Credit Squeeze & Insurance Rates
1. Introduction to Use of Credit Scoring for Insurance Availability and Pricing
This topic of using credit scoring to govern the distribution and pricing of insurance products has been debated for years, and most of us did not even know when our companies started using this credit scoring system against us. Here at www.Settlement
The history and use of credit scoring are set forth in articles in the section below titled "4. Background Reading and Resources." In addition, please see Employment Losses & Credit Restrictions Cause Auto Insurance Rate Increases: What YOU Should do About It
.Your ability to purchase any insurance product and your rates are based upon your "insurance score", NOT your credit score or credit reports. Insurance scores are developed differently and predict a different outcome than credit scores.
Insurers use a variety of methods to assign scores. AND there are company-developed algorithms that are secret, so companies may consider and weigh different factors they learn about in the lives of their consumers. The insurance score models were developed to predict future insurance losses, with some models examining actual policyholder driver loss data from insurance companies in conjunction with the corresponding credit data of that consumer.
Most of the companies do differ in how and why they use insurance scores. But little of this is known to the various State Insurance Commissioners. They have no idea what is included and weighed in the various algorithms. Nor are these government overseers blessed with any knowledge of how these companies will treat those who have suffered economic troubles not of their own making.
YES, it is true that most states DO have in place some kind of regulation regarding the uses of credit scoring. And we believe that a few states do not permit a lowered insurance score to result in an increased rate at renewal. But it appears that the remainder of the states have no protections against increasing rates of millions of otherwise blameless consumers who have suffered devastating economic losses through no fault of their own.
Insurance companies contend there is a direct correlation between the credit score and the likelihood that one is a higher insurance risk. Consumer advocates dispute that and point out that it permits insurers to charge higher premiums to lower income households. What do you think?
Most states have laws that restrict the use of credit scores. These are too varied to list, but many states stipulate that insurers can't use the scores as the sole basis for setting rates or for refusing to issue you a policy or renew your policy. You should write to your own state insurance commissioner to learn of the laws in your state. See Part THREE below.
According to Insure.com, there are some insurers that have their own "insurance scores", and no one in any state knows what is in their algorithms. "State Farm—the country's largest auto insurer—decided to use 'prior loss history and certain credit characteristics' to create its own model that helps it determine an underwriting score for a policyholder applying for a homeowners or auto policy."
A State Farm spokesperson says, "It is significant that we are combining credit characteristics and prior claims history for these models and that we have developed the models using our own book of business. Our models are not designed to assess wealth, income or creditworthiness, but focus on the prediction of future insurance losses."
State Farm adds that it believes the 'use of this model will lessen the extent to which those who represent higher potential risk are subsidized by those who represent lower potential risk.'"
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2. What is a "credit score" and "FICO score"? Who are TransUnion, Experian and Equifax and ChoicePoint—and how do they differ? Who is "Fair Isaac" and is he really "fair"?
A credit score is a number representing the creditworthiness of a person, or the likelihood that person will pay his or her debts. It is derived from information stored by the credit bureaus. Equifax, Experian (formerly TRW) and TransUnion are the consumer credit bureaus.
FICO is the most commonly used credit score. FICO is the acronym for Fair Isaac Corporation, a publicly traded corporation founded in 1956 as "Fair Isaac" by engineer Bill FAIRand mathematician Earl ISAAC.
They developed and refined a score based upon information from a consumer's credit files. This score is known by the acronym of the Fair Isaac Corporation: FICO. Hence, it is known simply as one's "FICO score".
The FICO score is primarily used in credit decisions made by banks and other providers of secured and unsecured credit. It is usually intended to show the likelihood that a borrower will default on a loan. Banks and other institutions use the FICO score as a factor in their lending decisions, and they may deny credit, charge higher interest rates, demand more collateral, or require extensive income and asset verification if the applicant's FICO credit score is low.
How do auto insurers get a hold of private credit information? The federal Fair Credit Reporting Act (FCRA), enacted over 30 years ago, expressly allows consumer reporting agencies to provide credit information to insurers for their business purposes.
Hence, all insurers use the FICO score when they make decisions regarding availability and pricing of their products. The companies differ in how they use the credit scores, and many companies have developed their own combination of factors that will impact their decisions on which drivers will be allowed to purchase their products, and at what price. The idea being that the price should reflect the risk of an insurance loss.
Whether they obtain the score by purchasing it, or whether they develop it themselves, or a combination of the two, the insurers, often using their own secret algorithms, develop what is called one's "insurance score". The purpose of the score is to segregate the potential purchasers of the various insurance products according to the perceived risk of an insurance loss.
There has been a lot of dispute over use of credit information as a key component of decisions regarding availability and pricing of insurance products. But that is a debate for another day: right now we are concerned with the issue of how these models can be modified—if at all—to accommodate the legitimate concerns of tens of millions of otherwise blameless consumers who have suffered economic losses and thus surely face increased rates for their auto insurance.
ChoicePoint is the main source of "insurance scores" that are ready to use. It provides insurance companies with underwriting and claims information services, including statistical models. Other ChoicePoint services to insurers include motor vehicle reports and a "Current Carrier" database that lists your current insurers, coverages and limits.
Here is a summary of how insurance scores are developed.
| Provides credit data | Builds scoring models | Runs models against credit files | Delivers scores to the final user |
| TransUnion | Fair Isaac | ChoicePoint | ChoicePoint |
| Equifax | ChoicePoint | TransUnion | TransUnion |
| Experian | Other Vendors | Other Vendors | Other Vendors |
| Company-Specific Models | Company-Specific Reports | Company-Specific Reports |
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3. FICO INSURANCE SCORE MODEL: What is in an insurance score?
The following is from triceiver.com. An insurance score takes into consideration many data contained in your credit report. Below is a breakdown of the Fair Isaac model which outlines the importance of each category. Note that the importance may vary slightly for different group of consumers, and of course other providers (ChoicePoint, et al.) have their own formulae.
| Type of Information | % of Score | Comments |
| Payment History | 40.00% | Payment information on specific accounts (credit cards, mortgage, car loans, etc.); delinquency; public records; collections; number and types of accounts |
| Amounts Owed | 30.00% | Total amount owed on all accounts and debt utilization rate overall |
| Length of Credit History | 15.00% | A average age of all accounts & time since accounts opened |
| New Credit | 10.00% | Number of recently opened accounts |
| Types of Credit Used | 5.00% | Number and types of accounts, current status, recent information |
An EXCELLENT example of how insurance scores work and the laws one progressive state has enacted is posted online by Washington's Mike Kreidler, one of the nation's leading state insurance commissioners:. Any consumer who is going to petition her state officials, should visit that site and become familiar with the arguments for and against credit scoring. For example, Commissioner Kreidler posted this summary of historical arguments plus comments on how the law works and implementation:
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4. ChoicePoint Factors Used to Create Insurance Scores
ChoicePoint is the largest supplier of insurance scores, marketing it as ChoiceTrust. Hence, we will start by looking at some of the factors it uses to create its insurance score. Of course it uses the credit score, and it allegedly owns (or has ready access to) data-warehoused personal consumer information, but it will not acknowledge how much of that, if any, it uses in creating the insurance score. What it has made public is the following list of 113 factors that it weighs using secret algorithms.
Here is a page from Choice Point listing some of the dozens of codes that might show up on a declined credit or adverse action report. They call these "ChoicePoint Attract Reason Codes".
ChoicePoint delivers millions of credit reports and insurance scores to the insurance industry each year. There is NO governmental oversight over this most important function of a business that impacts everyone who purchases auto insurance from any insurance company that uses this product. Do you believe that the following factors are really any indication of how safe a driver you are? How about asking your state legislator and your state insurance commissioner.
1.Number of Derogatory Public Record Items.
The score considers how many derogatory public records are on your credit file. Derogatory public records considered are bankruptcies, liens, garnishments, judgments and lawsuits. Question here: just WHO gets to decide what news about YOU is "derogatory"? WHY should it count against you if you were involved in a lawsuit in which your position was justified?
2.Number of Inquiries for Transactions Initiated by Consumer in Last 6 Months.
These are inquiries initiated when you are actively seeking to obtain credit. Why have you become a bad driver just because you were seeking a loan or new credit card? Other inquiry types such as inquiries as a result of a non-solicited promotional mailing or an account review inquiry (where a creditor with whom you have an existing relationship reviews your account) are not counted when calculating your insurance score. Inquiries as a result of obtaining your own credit report are also not counted. Inquiries from insurance companies are excluded.
3.Length of Time Accounts have been Established.
The score considers how long it has been since you opened your last credit account. This is done by calculating the number of months since the last account was opened.
4.Length of Time Since Newest Account has been Established.
5.Number of Accounts with High Percent of Balance to High Credit.
The score considers the number of accounts where the amount owed is high compared to the loan amount or the credit limit. The account is counted if the balance amount is 75% or greater than the credit limit.
6.Number of Bank Revolving Accounts Currently Paid as Agreed.
7.Number of Sales Finance Accounts with High Percent of Balance to Credit Limit.
The sum of balances divided by the sum of credit limits for all open sales finance accounts. An account is considered open if it has been reported in the last 12 months and has not been reported as closed. An installment account with a sales finance company must have a balance to be considered open. A sales finance account is usually associated with high-ticket retail items such as furniture, stereo, piano, etc.
8.Number of Open Installment Bank Accounts.
9.Number of Installment Bank Accts Currently or in the Past Reported as Bad Debt.
10.Number of Open Retail Accounts.
11.Number of Vehicle Related Accounts with a Current Past Due Amount.
12.Number of Vehicle Related Accts Currently or in the Past w/30 Day Late Payment.
The score considers missed payments on vehicle related accounts. Vehicle related accounts refer to tire dealers, auto parts stores, service stations, and new and used car lots, truck and farm equipment dealers.
13.Number of Open Auto Financing Accounts.
14.Number of Oil Company Accts Currently or in the Past with 60 Day Late Payment.
15.Time Since Most Recent Derogatory Public Record Item.
16.Number of Inquiries with Finance Companies Initiated by Consumer in Last 24 Mos.
17.Number of Accounts Opened in Last 24 Months.
18.Total Amount of Balances on Accounts.
19.Length of Time Since Most Recent Activity Reported.
20.Length of Time Department Store Accounts have been Established.
21.Number of Open Sales Finance Accounts.
22.Number of Open Vehicle Related Accounts.
23.Number of Open Personal Finance Company Accounts.
24.Number of Open Oil Company Accounts.
25.Percent of Balance to Credit Limit for Open Bank Revolving Accounts.
26.Percent of Accounts Reported in Last 24 Months to Total Accounts on File.
27.Percent of Open Accounts to Total Accounts.
28.Number of Accounts with a Balance Currently Paid As Agreed.
29.Percent of Open Bank Installment Accts to Total Open Accounts.
30.Percent of Open Credit Union, S&L, Mortgage Accounts to Total Open Accounts.
31.Account with a Reported Delinquency Status Including Bad Debt & Bankruptcy.
32.Account w/ Reported Delinquency Status Including Bad Debt & Bankruptcy in Last 24 Months.
33.Length of Time Bank Revolving Accounts Have Been Established.
34.Number of Department Store Accounts Established.
35.Number of Open Department Store Accts with Balance to Credit Limit of 50% or More.
36.Number of Sales Finance Accounts Currently with a 60 Day Late Payment.
37.Number of Retail Accounts Established.
38.Number of Oil Company Accounts Established.
39.Percent of Balance to Credit Limit for Open Sales Finance Accounts.
40.Percent of Open Bank Revolving Accounts to Total Open Accounts.
41.Number of Collection Agency Filings.
Number of items with collection agencies on your credit file. These usually appear in the public record section.
42.Number of Non-Closed Accounts.
43.Number of Accounts with a Past Due Amount.
44.Number of Accounts Currently or in the Past with 90 - 120 Days Late Payments.
45.Number of Bank Revolving Accounts Established.
46.Total Credit Limit on Open Department Store Accounts.
47.Number of Department Store Accounts Currently with 90-120 Day Late Payments.
48.Length of Time Sales Finance Accounts have been Established.
49.Number of Personal Finance Accounts Established.
50.Number of Open Credit Union, S&L or Mortgage Accounts.
51.Number of Open Auto Finance Accts Currently or in the Past w/60 Day or Worse Late Payments.
52.Percent of Open Sales Finance Accounts to Total Open Accounts.
53.Percent of Open Vehicle Related Accounts to Total Open Accounts.
54.Percent of Open Personal Finance Accounts to Total Open Accounts.
55.Percent of Open Oil Company Accounts to Total Open Accounts.
56.Length of Time Since Most Recent Consumer Initiated Inquiry.
57.Number of Accounts that have been Established.
58.Number of Accounts Currently with 30 Day Late Payments.
59.Number of Personal Finance Accounts Always Paid As Agreed.
60.Percent of All Department Store Accounts Reported in the Last 24 Mos to Total # of Accts.
61.Number of Accounts with 30 Day or Worse Late Payments in Last 24 Months.
62.Total Amount of Balances on Open Department Store Accounts.
63.Number of Open Sales Finance Accounts with a Balance.
64.Number of Auto Finance Accounts Always Paid As Agreed.
65.Percent of Balance to Credit Limit on Open Accounts.
66.Percent of Open Bank Revolving Accts to Total Bank Revolving Accts Established.
67.Number of Auto Finance Accounts Currently or in the Past with 30 Days or More Late Payments.
68.Number of Credit Union, S&L or Mortgage Accounts Currently or in the Past with 30 Days or More Late Payments
69.Percent of Open Department Store Accounts to Total Open Accounts.
70.Percent of Open Retail Accounts to Total Open Accounts.
71.Number of Auto Finance Accounts Established.
72.Number of Accounts Currently or in the Past w/30 Day Late Payments.
73.Number of Auto Finance Accounts with a Past Due Balance.
74.Number of Vehicle Related Accounts Currently or in the Past with 90 Days or More Late Payments.
75.Number of Accounts Reported Bad Debt in Last 24 Months/Derogatory Public Records
76.Number of Department Store Accounts Reported in the Last 12 Months.
77.Number of Personal Finance Accounts Currently or in the Past with 60 Day Late Payments.
78.Number of Auto Finance Accounts Currently or in the Past with 30 Day Late Payments.
79.Total Amount of Past Due Balances on Accounts.
80.Number of Vehicle Related Accounts Established.
81.Number of Bank Revolving Accounts Currently or in the Past with 30 Day Late Payments.
82.Number of Credit Union, S & L or Mortgage Accounts Established.
83.Number of Department Store Accounts with 90 - 120 Day Late Payments in Last 24 Months.
84.Number of Department Store Accounts Currently or in Past with 30 Day Late Payments.
85.Number of Accounts Not Paid as Agreed.
86.Time Since Most Recent Collection Agency Filing Reported.
87.Number of Accounts Opened in the Last 12 Months.
88.Number of Accounts Currently or in the Past with 30 Day Late Payments.
89.Number of Accounts with 90 - 120 Day Late Payments in the Last 24 Months.
90.Ratio of Total Amount of Past Due Balances to Total Balances on Accounts.
91.Number of Bank Installment Accounts with Current or Previous Late Payments.
92.Number of Open Bank Revolving Accts with Balance to Credit Limit 75% or Greater.
93.Number of Bank Revolving Accts Paid as Agreed in the Last 24 Months.
94.Number of Credit Union, S&L, Mortgage Accts w/Current or Previous Late Payments.
95.Number of Retail Accounts with Current or Previous 60 Day Late Payments.
96.Number of Accounts Always Paid as Agreed.
97.Number of Accounts with 60 Day or Worse Late Payments in the last 24 Mos.
98.Percent of Open Department Store Accts to Total Dept Store Accounts Established.
99.Number of Open Bank Revolving Accounts.
100 Lack of Sales Finance Acct with a Balance Currently Paid as Agreed.
101 Percent of Accts Opened in the Last 24 Months to Total # Accts that are Open.
102 No Public Record Items or Status of Public Record Items is Unknown
103 Insufficient Information on Bank Revolving Accounts.
104 Insufficient Information on Bank Installment Accounts.
105 Insufficient Information on Credit Union, S&L or Mortgage Accounts.
106 Accounts Currently No More Than 30 Days Late or Status Unknown
107 Insufficient Information on Oil Company Accounts.
108 Insufficient Information on Sales Finance Accounts.
109 Insufficient Information on Department Store Accounts.
110 Insufficient Information on Vehicle Related Accounts.
111 Insufficient Information on Personal Finance Accounts.
112 Insufficient Information on Retail Accounts.
113 Insufficient Information on Auto Finance Accounts.
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5. Background Reading and Resources: Learn About Credit Squeeze & Insurance Rates
Here is a helpful article by Jeremy M. Simon, of www.creditcards.com
Fed report: Banks tighten lending standards even more; senior loan officers' survey says lenders clamping down hard.
Loan officers' survey: Credit card lending standards tighten sharply.
Bad credit can inflate car insurance premiums—by Sandra Block, "Your Money",
How your credit score, occupation, and education level affect what you pay for auto insurance—by Lease Guide. "Companies such as Allstate charge poor-credit customers as much as three times the rate for customers with excellent credit. Some insurance companies such as Geico also use education level and occupation as additional factors in setting policy cost. In effect, a high-school educated supermarket clerk will pay more than a company president with a master's degree." Note: this was in 2006, and may have been changed since. But the point is: without government oversight, these secret algorithms can be pernicious. See "GEICO TIES INSURANCE RATES TO EDUCATION, OCCUPATION—Many Lower Income, Minority Consumers Pay Higher Prices—(March 2006). See also the Consumer Federation of American complaint letter of 2006 regarding GEICO's underwriting.
Changing credit card terms squeeze consumers
By Kathy Chu, USA TODAY
Across the nation, a growing number of consumers and financial experts are complaining that sudden credit card limit reductions and sharp interest rate increases are triggering a domino effect that makes it harder for consumers to juggle bills, stay in homes and avoid going broke. No official data are available on how many people are being pushed into financial distress by credit cards rather than mortgages. But credit counselors, bankruptcy lawyers and legislators say banks increasingly are pummeling consumers for making the smallest payment error — or making no error at all.
Credit card limit reductions and closings: Higher debt utilization ratio will lower FICO score
By Kelli B. Grant for msn.SmartMoney.com
For consumers, however, account closings can be devastating, especially to their credit scores. Your credit utilization ratio -- the amount of your debt in relation to the amount of your available credit—constitutes 30% of your scores, says Craig Watts, a spokesman for Fair Isaac, the company that calculates and issues the FICO credit scores that most lenders use. So when an account is closed, you have less credit available to you, and your ratio immediately jumps higher.
A person with solid credit scores of 720 whose utilization ratio jumps from 35% to 75% after an account is closed is likely see scores drop by "several dozen points," to somewhere in the 600s, Watts says. That's a far cry from the 760 (or higher) consumers need to get the best rates from lenders.
Credit scoring is highly unfair according to Robert Pregulman, Consumer Advocate, Seattle Post Intelligencer, "Consider this scenario: You recently lost your job and you are trying your best to scrape by until you can find another one. But because you no longer have a source of income, you miss a payment on a credit card bill.
Soon after you miss your credit card payment, you get a notice from your car insurance company that your rates will be going up even though you have paid all your premiums on time and have had no recent accidents or tickets.
Why is your car insurance company increasing your rates? Because you didn't pay your credit card bill on time. You are now among the growing number of victims of credit scoring.
A "credit score" is a number insurance companies assign to you based on information they find in your credit report, such as bill paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt and the age of your accounts. The total number of points received determines your credit score, which will range between 300 and 850 (a higher score means you pay a lower insurance premium).
Here are the types of actions that can hurt your credit score and lead to either higher insurance rates or a denial of coverage: You did not pay a credit card, utility bill or any other bill on time; you have a large number of credit cards; you have a large number of open credit accounts, even if they have a zero balance; you switched credit cards to get a better interest rate; you have a large outstanding balance on a credit card; you take out a loan for any reason; or you pay the majority of your bills by cash or money order.
If you think this practice is unfair, you are right. It is wrong that the simple act of opening a credit card account or taking out a loan could dramatically damage your credit score and increase your insurance premiums. In fact, you could have paid every insurance bill you ever received on time and never filed an insurance claim, and you could still have a bad credit score that would either make you pay significantly more for insurance or prevent an insurance company from offering you insurance coverage.
Furthermore, there is no set procedure that insurance companies follow to determine how your credit score will affect your rates and consumers do not have access to what factors are used to determine their credit score."
Here is a super listing of what is known to go into an insurance score
By Triceiver.com Editors
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RESOURCES:
Resources to Investigate & Correct Your Own Credit Scoring Files
Has the following subtopics:1.You SHOULD LEARN AND CORRECT What Your Auto Insurer Knows About You
2.General Credit Resource Links and Contact Information
3.Here is part of a long-range strategy to improve one's credit score
ACTION PAGE: Sample Letters to Insurer, to State Insurance Commissioner & to State Legislative Delegation
Has the following subtopics:1.Reasons to Demand Exemption NOW, & Follow-up With Insurance Commissioner and State Legislative Delegation
2.Gathering Facts to Support Your Argument
3.Here is some framework upon which citizens could construct letters to their state officials
Employment Losses & Credit Restrictions Cause Auto Insurance Rate Increases: What YOU Should do About It
SettlementCentral.Com Letter to National Association of Insurance Commissioners re: Credit Scoring
SITE NOTE:
The usual insurance claim business of www.Settlement
Insurance Claim Help & Demand Letters for Auto Accident, Dog Bite, and Slip/Trip & Fall Accident Victims
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