An unexpected letter

Our credit scores are in great shape, but I just received a reason to make sure that they stay that way: a letter from our insurance company.

Part of the letter, which referenced “Changes to Homeowners and Renters Policy Rating Factors”, said: “We’ve made a filing in your state to use credit-based insurance scores. If our filing is approved, we will use credit-based insurance scores to help determine your next property policy premium. You may see a change in the cost of your coverage.”

The part of the Fair Credit Reporting Act with allows insurance companies to do this says:

§ 604. Permissible purposes of consumer reports
(a) In general. Subject to subsection (c), any consumer reporting agency may furnish a consumer report under the following circumstances and no other:
[…] (3) To a person which it has reason to believe
(A) intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer; or
(B) intends to use the information for employment purposes; or
(C) intends to use the information in connection with the underwriting of insurance involving the consumer; or
[…]

This means that, if the filing is approved, our rates could go up or down based in part on our credit score. I did a quick search for credit-based insurance scores on Google, and while I didn’t find a whole lot specifically about their use in homeowner’s insurance, I did find a very detailed report by the FTC about their use in auto insurance.

That report details the impacts of credit-based insurance scores on car insurance consumers. Since I plan on eventually not having much of a credit score (once we pay off our house, the plan is to only use credit for cash-back rewards, so eventually our score will decline because there will be less to base it on) I was concerned about how this might eventually impact us.

The report says:

“The FTC’s assessment indicates that consumers for whom scores were not available appeared slightly riskier when scores were considered than when they were not. The Commission compared the results from risk models without scores with results from risk models with scores that also included categories for “no hit” and “thin file” in making this determination. No-hit consumers were 1.06 times riskier in a model that included controls for scores compared to a model that did not. Thin-file consumers were 1.02 times riskier in a model that included controls for scores compared to a model that did not.”

So it sounds like having no credit score or not enough information to calculate a credit score is a factor, but not as large of a factor as having bad credit. Which makes sense, I guess. Still, I wonder how this will play out for us. Hopefully it will at least result in a decrease for now.