logo

Credit Scoring FAQs

Credit-based insurance scoring is used by most personal automobile and homeowners’ insurers in Nevada as one criterion to decide for what coverage you will be eligible and how much premium you will pay. This series of frequently asked questions and answers is intended to assist you in understanding how credit-based insurance scoring may affect the cost of your automobile or home insurance.

 What is a credit-based insurance score?

A credit-based insurance score (CBIS) is a numerical score that your insurance company assigns to you based on your credit history. This number is typically based on several pieces of your credit information, which vary among insurers because different insurers use different CBIS models. A credit-based insurance score is not the same as a credit score used by lenders.

 Can an insurance company look at my credit information without my permission?

The federal Fair Credit Reporting Act (FCRA) permits businesses with which you have an on-going business relationship to examine your credit information without your permission. This includes your current insurer who may access this information for the purposes of underwriting and rating you. Nevada Revised Statute (NRS) 686A.700 requires an insurance company to disclose to an applicant, on their application or at the time the application is taken, that the company uses credit information in insurance underwriting or for rating purposes. To find out more about the federal law, go to the Federal Trade Commission (FTC) Web site. For information about the state law, the rights it gives you, and the manner in which it governs the use of credit information by insurers, see Nevada’s statutes on credit scoring.

 Why do some insurance companies use credit information?

The insurance industry asserts that credit-based insurance scores correlate with the risk of insurance losses, such that consumers with lower credit-based insurance scores also have a higher likelihood of filing more insurance claims. The industry also asserts that credit-based insurance scores measure an insured’s financial responsibility, which is also an indicator of responsibility in other areas of the insured’s life, such as driving and home maintenance. As such, insurance companies use credit information under the interpretation that this information helps them appropriately price the insurance risk they are undertaking.

 Do all insurers use credit-based insurance scoring?

No. While the majority of insurers in Nevada use some manner of credit-based insurance scoring, there is also a minority of insurers that do not use your credit information for insurance underwriting and rating purposes. 

 Which insurance companies in Nevada use credit-based insurance scoring, and which companies do not use it?

Pursuant to Assembly Bill 120 (2013), the Division of Insurance publishes lists of companies that use and companies that do not use credit-based insurance scores in insurance underwriting and rating. A list of private passenger automobile insurance companies by usage status of credit-based insurance scoring is available here. For home insurance companies, such a list is available here.

All content in these lists is provided to the public for informational purposes only.  The Division of Insurance does not promote, endorse, or recommend any insurance company regardless of underwriting or rating systems.

 How are credit-based insurance scores typically used by insurers?

Some insurers use credit-based insurance scoring for the purposes of underwriting and rating insureds. Underwriting is the process by which an insurer decides whether or not to accept you as a risk and under what conditions any acceptance is made. Rating is the process by which an insurer determines the premium you will have to pay.

Your premium may be higher or lower as a result of credit-based insurance scoring than it would have been if credit information were not used. Also, where one insurer might treat you more favorably due to your credit information, another insurer might treat you less favorably on the basis of the same information. It is a good idea to shop around for competitive rates and terms.

 Who develops credit-based insurance scoring models?

Some insurers develop their own proprietary credit-based insurance scoring models, on the basis of data collected individually by those insurers. Other insurers purchase models that have been developed by third-party vendors of credit information. The three major third-party vendors who sell credit-based insurance scoring models to insurers in Nevada are Fair Isaac Corporation, LexisNexis (formerly ChoicePoint), and TransUnion.

 How is a credit-based insurance score calculated?

Credit-based insurance scores calculate the numerical score on the basis of a statistical model that employs a set of credit-related variables selected by the insurer or third-party vendor that created the model. The model gives relatively more or less consideration to certain variables, and insurers use a variety of mathematical steps in converting the information in your credit report into a score. You can find a list of characteristics commonly used in credit-based insurance scoring.

 Where do insurers get information about my credit history?

Most insurers obtain your credit information by subscribing to either one or more of the three national credit bureaus – Equifax, Experian or Transunion – or from a data vendor such as LexisNexis (formerly ChoicePoint). Lenders report their customers’ information to these credit bureaus on a voluntary basis. A data vendor collects data from the credit bureaus and then provides the data to insurers and other entities.

 How can I find out what information insurers are able to see regarding my credit history? 

 Any credit information about you that is accessible to an insurer is located in your credit report. Federal law gives you a right to obtain one free credit report every year from each of the major consumer credit reporting bureaus. Additionally, if you have been denied insurance or credit, are a victim of identity theft, are unemployed, or are on welfare, you also have a right to receive a free copy of your credit report.

 You can order your annual free credit report from the three credit bureaus at the same time through a central  Web site, by calling toll-free 1-877-322-8228, or by sending a request via U.S. mail to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.  

 You may also choose to purchase a credit report through an individual credit bureau. Keep in mind that some credit bureaus may charge you an additional fee if you order a credit report more than once every 12 months.

 What can I do if I think my credit report contains errors?

 Report the errors

Each credit bureau is obligated by law to investigate any error you report and to respond to your request within 30 days. The credit bureau is required to correct your credit information if it fails to find proof that the disputed information is true, or if it finds proof that the information is false.

The credit bureau must also send a notice of correction to any insurer or creditor who examined your credit file within the most recent six months. After a correction has been made, you may benefit by requesting another copy of your credit report in a few months’ time, in order to make sure that the erroneous information has not reappeared.

In the event that the credit bureau finds that the information you disputed is correct, you still have some recourse. The Fair Credit Reporting Act (FCRA) gives you the right to incorporate a statement of 100 words or fewer in order to explain your position with regard to the disputed information. The credit bureau is required by law to add this statement to your credit information anytime this information is released to anyone.

 Contact your insurer

NRS 686A.690 gives you the right to have your insurance policy re-underwritten or re-rated if an error in your credit file is corrected. After the credit bureau sends a notice of correction to your insurer, the insurer has 30 days to re-underwrite and re-rate you. If it is discovered that you overpaid an earlier premium, a refund will be issued to you for any overpaid premium pertaining to coverage you obtained as far back as 12 months earlier.

If you believe that your insurance company has relied on erroneous credit information, you do not need to wait until the credit bureau has investigated your dispute. Tell your insurer right away that you believe an error exists. Some insurers in Nevada may immediately exclude disputed information from consideration in credit-based insurance scoring, and this information will continue to be excluded until the dispute is resolved.

 Are the credit scores used by insurers the same as the credit scores used by lenders?

No. Credit-based insurance scores (CBIS) are not the same as the credit scores used by lenders. This is particularly important to recognize, as the colloquial term “credit scoring” is often used interchangeably for both kinds of scores. While credit-based insurance scores may take into account some of the same information as credit scores used by lenders, there are important differences in their purpose and calculation.

CBIS was designed with the intention of predicting the risk of insurance losses, whereas credit scores used by lenders were designed with the intention of predicting a consumer’s likelihood of paying credit obligations as agreed. CBIS may use selective portions of your credit information compared to the credit scores used by lenders. CBIS may also place different degrees of emphasis on credit information that is used by both insurers and lenders.

 Is my premium based entirely on my insurance credit score?

No. All insurers base their insureds’ premiums on a variety of factors other than credit. For example, the premium for your automobile insurance policy may be based in part on the year, make, and model of your car, your age, gender, and marital status, the area in which your car is garaged, and your driving history. The premium for your homeowner’s insurance policy may be based on the age of your house, its location, its replacement cost, and its proximity to the nearest fire department. Provisions of NRS 686A.680 prohibit the use of credit information unless the insurer also considers other applicable factors.

 Can an insurance company deny my application for insurance or cancel or non-renew my insurance policy solely because of my credit history?

No. NRS 686A.680(2) prohibits an insurer from denying, cancelling, or failing to renew a policy on the basis of credit information unless the insurer also considers other applicable underwriting factors that are independent of credit information and are not expressly prohibited by Nevada law.

 How do I know if an insurer is using my credit information?

The insurance agent or other representative of the company to which you are applying will know whether the insurer is using your credit information. NRS 686A.700 requires insurers to disclose the fact that credit is being considered. If you are filling out a written application, the insurer must provide you with a written disclosure. If you are applying over the phone or the Internet, the disclosure must be made in the same medium as the application.

At any time, you may ask a representative of your insurer whether credit history is considered for underwriting, and, if so, how your eligibility for coverage may be impacted. Remember that, in Nevada, insurers may not deny you insurance coverage solely on the basis of your credit history or lack thereof. Also ask whether credit history is considered for rating, as well as whether the company will check the credit history of other people insured on your policy.

 Must an agent or company tell me what my credit-based insurance score is?

No. Although Nevada law requires disclosure that your credit information is being considered, there is no specific requirement that your numerical credit-based insurance score be disclosed.

If your premium increases due to credit-based insurance scoring and you file a consumer complaint with the Division, Nevada Administrative Code (NAC) 686A.690 requires an insurer to respond within 20 working days of the Division’s inquiry on your behalf. The Division is often able to work with consumers and insurers to determine what aspects of consumers’ credit histories contributed to premium increases.

 Can an insurance company increase my premium when renewing my policy solely because of changes to my credit history?

Pursuant to NRS 686A.680(3), an insurer is only allowed to base renewal rates for an insurance policy on credit information if the insurer also considers other applicable factors that are independent of credit information.

 If I do not use credit or do not have an extensive credit history, can an insurer increase my premium as a result?

NRS 686A.680(5) requires that individuals with no credit history (credit “no-hits”) and individuals with limited credit history (credit “thin files”) be treated no more adversely than if they had neutral credit information.

 What credit information is considered in credit-based insurance scoring models?

 

 That depends on the model. The following table provides an overview of some of the more frequently used credit information in credit-based insurance scoring models.

 Credit Characteristic

 Special Considerations

 Typical Impact

Number of late payments on credit accounts Late payments are also referred to as delinquencies. A larger number of delinquencies is typically treated less favorably. Some models penalize even one late payment.
Number of adverse public records Examples are bankruptcies, foreclosures, and tax liens. A larger number of adverse public records is typically treated less favorably. Many models penalize even one adverse public record.
Length of credit history Measured as the combined age of all credit accounts, the average age of all credit accounts, the age of the oldest account, or in other ways. A longer credit history is typically treated more favorably. 
Number of inquiries for credit for which the consumer recently applied Most insurers consider time periods between 12 and 36 months, inclusive. A larger number of inquiries is typically treated less favorably. Many models penalize even one inquiry.
Number of accounts recently opened Most insurers consider time periods between 12 and 36 months, inclusive. A larger number of newly opened accounts is typically treated less favorably.
Presence or absence of certain kinds of credit accounts   Major credit cards are typically, though not always, treated more favorably than other types of consumer credit.
Utilization of credit accounts Utilization is measured by a ratio of credit balance to credit limit or credit balance to historical high credit amount – either for individual accounts or for the totality of one’s account. Lower utilization of credit accounts is typically treated more favorably.
Total balances May be considered for all credit accounts or only for certain types of credit accounts. Some models treat higher balances less favorably, while others treat higher balances more favorably.
“Account mix” “Account mix” variables consider proportions of certain types of credit accounts (e.g., department store accounts, major credit card accounts, vehicle loans) to the total number of credit accounts. Treatment varies considerably among models.
Total number of credit accounts (open or closed) Some models always treat larger numbers of open or total credit accounts more favorably; other models always treat larger numbers of open or total credit accounts less favorably. For still other models, there is an “optimal” value of open or total credit accounts, and any greater or smaller number is treated less favorably. While it is difficult to generalize regarding these variables, having no open credit accounts or no credit accounts at all will generally not result in the most favorable treatment.
Ratio of currently open credit accounts to total number of credit accounts   Most models treat a larger ratio of open accounts to total accounts more favorably, but this is not always the case.

 

Not all models use all of this credit information, and different models may interpret and evaluate any of this credit information in widely differing ways. Some models may also use credit information not encompassed in the above list.

 What is a “good” credit-based insurance score?

This depends on the credit-based insurance scoring model being used and the way in which this model is incorporated into the insurer’s overall rating structure. Different models generate different ranges of possible scores. Also, the treatment of the same numerical score can vary considerably on the basis of the rating factor the insurer assigns to that score. A rating factor is typically a multiplier that modifies your premium. For instance, a rating factor of 1.25 for a particular variable increases your premium by 25% compared to an otherwise identical rating plan where that variable is not considered.

Some insurers even consider credit-based insurance scores only in combination with other rating variables, such as the age of your home or your prior bodily injury liability (“prior BI”) limit of coverage on your automobile insurance policy. For instance, the insurer might have rating factors assigned for each combination of credit-based insurance score and prior BI limit, but not separately for each credit-based insurance score.

Ask your insurer if your credit-based insurance score is helping lower your insurance premium.

 Do credit-based insurance scoring models take into account whether or not I need credit in order to live the way I do?

No. Credit-based insurance scoring models are not designed to evaluate whether or not you need credit to facilitate any kind of lifestyle. Such models also do not take your wealth or your income into consideration. Credit-based insurance scoring models do not consider your reasons for using or choosing not to use credit. They develop a numerical score based on the values of the variables built into the models based upon your credit information.

 If I do not have an extensive credit history but have always paid my bills for rent, utilities, and telecommunications services on time, will I receive a better credit-based insurance score?

No. Credit-based insurance scoring models do not consider your information pertaining to non-credit payments. Most utilities and telecommunications services do not report prompt payment information to major credit bureaus. However, if a missed payment results in collection action, such action may get reported to the credit bureaus and subsequently adversely considered in credit-based insurance scoring models.

 If I always pay my credit card balance in full every month and never carry a balance over to the next month, will this be reflected in my credit-based insurance score?

No. Credit-based insurance scoring models will only consider whether or not you pay your accounts “as agreed” – i.e., whether or not you make at least the minimum required payment every month. While never carrying over a credit card balance is indicative of financial responsibility, credit reports currently do not contain information that would allow insurers to identify such behavior.

 For credit-based insurance scoring variables that measure account utilization, will I be guaranteed to receive the most favorable treatment if I always pay my account balances off in full every month?

No. Credit-based insurance scoring models are unable to recognize a balance as being paid off in full. Rather, the “balance” that appears on your credit report is a random snapshot in time, and it is up to your lender when that snapshot is taken.

If you never make purchases with a credit card which you have, then your balance will always be reported to the credit bureaus as $0. However, some credit-based insurance scoring models may penalize you for “account inactivity” – or not using open credit accounts. Whether a given credit-related behavior will benefit you, penalize you, or not affect you at all will depend on the credit-based insurance scoring model in question, as well as how it is incorporated into the insurer’s rating structure.

 Why are inquiries for credit considered in some credit-based insurance scoring models?

Some insurers believe that a consumer’s number of inquiries for credit reflects “credit-seeking behavior” that may serve as an indicator of insurance risk. The consideration of inquiries in insurance rating is permitted under Nevada law. However, this is subject to the restrictions of NRS 686A.680(8). Insurers are prohibited from using the following types of inquiries in a manner that may negatively impact your premium:

  • Inquiries not initiated by you
  • Inquiries made when shopping around for insurance coverage

NRS 686A.680(8) also restricts the use of multiple credit inquiries made with relation to a home loan or mortgage or an auto loan. Such inquiries may only be used if counted as only one inquiry if they are made within a 30-day time period.

It is important to know that different insurers can treat the number of inquiries differently.

 If a collection account related to a medical bill appears on my credit report, can this adversely affect my insurance premium?

NRS 686A.680(8)(c) prohibits an insurer from negatively impacting an insured’s premium on the basis of collection accounts relating to medical treatment. Provided that the credit report accurately identifies the collection account as being medically related, the insurer may not use the account in credit-based insurance scoring.

 If a catastrophic event adversely affected my credit history, am I eligible for an exemption from credit-based insurance scoring under Nevada law?

If you have suffered from an extraordinary life event (ELE) that adversely affected your credit history, you may be eligible for an exemption from the use of credit information by your insurer.

 NRS 686A.685 came into effect on October 1, 2011. It provides that a personal-lines insurer that uses credit information shall, upon receipt of a written request from an applicant or policyholder, provide reasonable exceptions to the insurer’s rates, rating classifications, company or tier placement, or underwriting rules or guidelines for an applicant or policyholder who has experienced and whose credit information has been directly influenced by any of the following:

(a) A catastrophic event, as declared by the Federal or State Government;

(b) A serious illness or injury, or a serious illness or injury to an immediate family member;

(c) The death of a spouse, child or parent;

(d) Divorce or involuntary interruption of legally-owed alimony or support payments;

(e) Identify theft;

(f) Temporary loss of employment for a period of 3 months or more, if it results from involuntary termination;

(g) Military deployment overseas; or

(h) Other events, as determined by the insurer.

Nevada law gives the insurer the prerogative to require that you provide reasonable written and independently verifiable documentation that the extraordinary life event occurred and that it had a direct and meaningful impact on your credit information. However, the insurer also has the option to grant the exception without requiring such documentation.

The new law requires insurers to disclose the availability of these exceptions to you. This disclosure may be made in a separate mailer, in a new notice, on the policy declaration page, or in an adverse-action notice.

You should be aware that the adverse impact of an ELE on your credit information may last for several years – even after you no longer experience the actual event that caused the adverse impact. The Division recommends that you check your credit history annually, communicate any ongoing adverse impact from the ELE to your insurance company or agent, and seek exceptions under the new law.

If you have experienced an extraordinary life event, ask your insurer about possible exemptions from credit-based insurance scoring. Ask what events, in addition to those enumerated in Nevada law, the insurer considers and what evidence you would need to present regarding your hardship. You are encouraged to contact the Division’s Consumer Services section and file a complaint if you believe that your insurance company is not granting a reasonable exception, despite compelling evidence that such an exception is warranted.

 How often will my insurer check my credit information and update my credit-based insurance score?

NRS 686A.680(7) requires an insurer who uses credit-based insurance scoring to automatically update the score at least once every 36 months, or more frequently if this is a consistent practice for the insurer. The insurer must also re-score you once every 12 months if you request it.

The Division has, pursuant to the authority granted by NRS 686A.680(7)(a), approved requests from a limited number of insurers for an exception to the 36-month re-scoring requirement. These insurers will re-calculate the credit-based insurance score at renewal only upon request from their current policyholders. In these situations, the Division requires insurers to notify policyholders of their right to request that their credit-based insurance scores be re-calculated at renewal.

You may wish to contact your current or prospective insurance company and find out whether and how the company would update your credit information.

 How can I improve my credit-based insurance score?

Different CBIS models place emphasis on different credit characteristics, and it is possible that a characteristic that would benefit you under some scoring models may penalize you under others. It is possible that a representative of your insurer may assist you with this question, but it is also possible that you might not be given an answer if the aspect of the model about which you inquire is considered “proprietary and confidential” information.

 How do I know if my credit history is adversely affecting my insurance premium?

Nevada law offers some transparency for consumers with regard to credit-based insurance scoring, particularly for consumers who have experienced an “adverse action” – defined by NRS 686A.610 as a “denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of, any insurance, existing or applied for, in connection with any policy.”

NRS 686A.710 requires any insurer who increases your premium or takes any other adverse action against you on the basis of your credit information to provide you with a notice. This notice must describe no more than four credit-related factors that were the primary influences of the insurer’s decision. This description must be clear and specific enough to enable you to identify the insurer’s reason for taking the adverse action.

If your premium increases or you encounter any other unfavorable treatment as a result of credit information, look for a “notice of adverse action” from your insurer in your renewal offer packet. Remember that your insurer is required by law to provide such a notice to you.

 Where can I go for help with credit problems?

Non-profit credit counseling organizations exist to help people resolve credit problems. Credit unions, universities, housing authorities, military bases, and churches may operate such programs. Anytime you inquire about a credit counseling service, make sure to ask about how, if at all, your use of the service will be reported on your credit file. Also make sure to ask about the fees, if any, involved in receiving the credit counseling services.

Whenever you contact a service for help with credit problems, make sure that the service is reputable and that the solutions it offers are genuine, compliant with all laws, and capable of actually being implemented. For instance, you cannot successfully remove a correct piece of information from your credit file. Treat with caution any organization that offers to do this for you.

 Will my credit history haunt me forever?

Certain portions of your credit history expire after passage of several years. For example, Federal law requires that most delinquencies remain in a person’s credit file for no longer than seven years. A bankruptcy may remain on your credit file for as long as 10 years.

However, other portions of your credit history may have a longer-term impact. For example, the length of your credit history, your mix of accounts, and the types of credit you have or have not used may be items that cannot be easily remedied or cannot be remedied at all.

Depending on how the specific credit information is used by an insurer, you may or may not have recourse with regard to improving your score with respect to such items.

 Is there a demonstrated causal relationship between credit-based insurance scores and insurance risk?

The insurance industry considers that a correlation exists between credit-based insurance score and the frequency of insurance losses. This correlation occurs at a broad model-wide level.

However, correlation is not causation. The fact that changes in one variable appear to correspond to changes in another variable does not adequately explain why this correspondence occurs and what is responsible for it. For example, some studies have shown that people with less favorable credit-based insurance scores file automobile insurance claims more frequently, as a group, than people with more favorable credit-based insurance scores. But no conclusions have been reached as to whether or how credit-based insurance scores actually lead insureds to drive in certain ways, to cause more or fewer accidents, or to file more or fewer insurance claims.

Insurance industry representatives have stated that they are not aware of the exact reasons behind the observed correlation or the reasons why specific credit variables correspond to insurance risk. However, they consider credit-based insurance scores to be useful predictors of insurance risk for large groups of individuals.

 Does credit-based insurance scoring penalize minorities or low-income consumers?

This question is one of the more controversial topics in the debate on credit-based insurance scoring. To date, no conclusive answers have been reached, although several extensive research efforts have been conducted. Some of the most cited research includes studies performed by the University of Texas (2003), the Missouri Department of Insurance (2004), the Texas Department of Insurance (2004), and the Federal Trade Commission (2007).

Insurers who use credit-based insurance scoring note that income, wealth, gender, marital status, religion, nationality, age, and location of property are not used in their credit-based insurance scoring models.

However, some consumer advocacy groups believe that there may be a disparate impact on minorities and low-income consumers due to credit-based insurance scoring. Disparate impact may occur when ethnicity and income are not explicitly considered, but the variables that are considered correlate significantly with ethnicity or income. Consumer groups that oppose credit-based insurance scoring argue that a much larger percentage of minorities and lower-income people may be adversely affected by credit-based insurance scoring models.

Today, there exists considerable debate on both sides of the question of whether or not disparate impact is sufficient to show unfair discrimination.

Studies on credit-based insurance scoring on the Web:

 Have insurers adjusted their credit-based insurance scoring models in response to the current economic environment?

Many insurers claim that average credit-based insurance scores have not changed as a result of the current crisis. These insurers acknowledge that there has been an increase in bankruptcies and foreclosures, as well as unilateral reduction of credit limits by some lenders – which may lower credit-based insurance scores. However, these insurers also state that many individuals have reduced their credit balances and applications for new credit – which may raise credit-based insurance scores.

Many developers of credit-based insurance scoring models state that they continually monitor the predictive abilities of their models and that the models are regularly validated on the basis of more recent data. However, because the dramatic changes in the U. S. economic environment occurred quite recently, there may not yet be sufficient data available from the recession period to enable one to draw substantive conclusions.

 Where can I get more information on credit-based insurance scoring?

  • Ask your insurance agent or company about whether you might be able to access any educational material pertaining to your insurer’s use of credit.
  • Contact the Federal Trade Commission (FTC) for information about the Fair Credit Reporting Act (FCRA) and consumer brochures on credit. Visit the FTC’s Web site (link: ) or call the FTC at 1-877-382-4357.
  • Search the Internet for news articles, studies, and educational websites on credit-based insurance scoring. However, always check that the information you find discusses how credit information is used by insurers in particular – since lenders often use it differently.
  • Your local Cooperative Extension Service may be able to offer you information and advice to help you improve your credit history. The University of Nevada, Reno, offers a Cooperative Extension Service.

As the ultimate consumer protection agency on insurance issues, the Nevada Division of Insurance exists to serve you. We can be a source of unbiased information and assistance to you. While most insurers have policyholder service officers to handle your policy-related questions, we encourage consumers interested in further information on credit-based insurance scoring to contact the Division of Insurance:

 

 Northern Nevada

State of Nevada

Department of Business & Industry

Division of Insurance

1818 E. College Parkway, Suite 103

Carson City, Nevada 89706

(775) 687-0700

Toll-Free in Nevada: (800) 992-0900

 E-mail

 

 Southern Nevada

State of Nevada

Department of Business & Industry

Division of Insurance

2501 East Sahara Ave., Room 302

Las Vegas, Nevada 89104

(702) 486-4009

Toll-Free in Nevada:

(800) 992-0900

 E-mail