Editorial Policy

Can insurance companies check your credit?

Erica Sandberg

June 10, 2014

QHi Erica,

I just found out that my insurance company did a credit check on me, and I'm furious. What right do they have to check up on me? Won't that affect my credit rating to have people checking my reports without my knowledge? Is there anything I can do? Thanks. –Sue

ADear Sue,

Try to calm down. There are countless injustices in the world, but this isn't one of them. The fact is, insurance companies are legally entitled to access the information on a person's credit report any time they want to. Along with banks, credit unions and other financial institutions, they can peek without your permission. Others, like landlords and employers, have to wait for your written approval.Ask Erica

The reason? Business. Insurance carriers are interested in seeing your credit reports for a couple of reasons. One is that they are always in the process of seeking good customers, so they would like to send offers to qualifying individuals. The information they see on a credit report is important to their underwriting process. Essentially, the company wants to determine if you're the type of person who pays your bills on time.

Additionally, there has been some statistical evidence that people who demonstrate greater financial responsibility make fewer and less expensive claims than those who have tarnished credit. Therefore, checking reports helps the company accurately price premiums. Do know, though, that credit rating alone may not be the sole reason you would be accepted, but most states allow credit history to help determine the rate you would be charged. Typically, insurance companies use credit-based insurance scores to determine how likely a consumer would have an insurance loss. These scores look at elements of your credit history, but are different from the score a lender looks at.

If the insurance company denies you coverage or gives you less than the best rate due to your credit information, it must, by federal law, tell you the name of the company that supplied the information. You can then go to the supplier of the credit information and get a free copy of the report, check it for accuracy and fix any mistakes.

So you see, it's not some random busybody spying on you just because they can. The data listed on your report helps them gauge their risk in doing business with you. So they not only have a right to check, they have a legitimate reason.

If you're still not appeased by this explanation, perhaps you will be by knowing that these types of credit checks do not affect your credit rating. They are considered soft inquiries (or “pulls”). Only hard inquiries, which is when you apply for a product such as a loan or credit card, are factored in to your credit scores. Even when they are, it's a minor negative, as hard inquiries comprise a paltry 10 percent of a FICO, the credit score most lenders use.

Yet another reason to rejoice is that you have the power to stop the majority of these nonconsensual credit checks with a security freeze. The rules and fees vary between states, but victims of identity theft can get freezes for free. With a freeze in place, all but a very few will be able to access your credit history without first obtaining your authorization.  The exceptions to this rule include current lenders and collection agencies.

Each credit bureau has its own freezing process, so if this is the way you want to go, visit their websites at TransUnion, Equifax, and Experian.

As with every up, however, there's a down, so understand that freezing your file can result in approval delays. Therefore, if you do make your credit history invisible with a freeze, give yourself plenty of time to thaw it out when you're interested in borrowing money, renting a home, applying for a job, getting insurance, or doing anything else that requires a credit check.

I do hope you're a lot less furious now!

Got a question for Erica? Send her an email.