Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.

March 21, 2002

"Insurance Companies And Your Credit Score"

Host: Have you applied for car insurance lately? Home coverage? Well, it turns out insurance companies are doing a little digging before they decide whether to cover you -- and they're looking into corners of your life you might not expect. Here's Jordan Goodman with this week's edition of "The Road to Riches."

You may not realize it, but your credit score is being looked at for far more than just loan decisions when you apply for a mortgage, car loan or credit card. The most controversial use today is by insurance companies who look at your credit score to decide if they will write you a policy, and if so, at what premium rate. This is being used particularly by auto and home insurance companies.

Car insurance companies claim that your credit score is a better predictor of your likelihood of filing a claim than your driving record. They think this is because people with good credit scores tend to partake in less risky behavior and safer driving habits. Therefore, if you have a lower credit score you may be dropped by your insurance company, or have your premium rates jump, even though they won't tell you it's because of your credit score.

The same is true of homeowner's policies. Home insurance companies find that people with lower credit scores tend to file more homeowner's claims for theft, fire and liability because they are not as careful around the house, or live in worse neighborhoods.

Many consumer groups have protested these policies, saying that people can have lower credit scores because they are poor, are immigrants, senior citizens, or because people have errors on their credit reports that have not been corrected. People who pay in cash and don't have bank accounts also have bad or even nonexistent credit reports. These people are being unfairly penalized with higher insurance rates as a result.

Some states have started to react. The states of Washington, Idaho and Utah have passed laws that restrict the use of credit scores in underwriting insurance. About 20 states have had legislation introduced on the subject.

The insurance companies say that using credit scores actually helps people with good scores get lower insurance premiums than they would otherwise get, and that people with bad scores deserve to pay higher rates because they pose more risk.

So what can you do to improve your credit scores so you can qualify for good insurance rates? The first step to take is to look at your credit report and score at and make sure your report is accurate. It will also tell you what your credit score is, and what you can do to improve it. If your insurance company drops you or hikes your rates, ask them if it is because of your credit score. You could complain to your state representative, asking them to support legislation stopping this practice Other than that, there's not much you can do except be aware this is going on.

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