Credit has become an important factor in underwriting for home and auto insurance because it helps make assessing risk more accurate and fair.

Insurers use credit in a different way than banks, for example.

Banks use a “credit score” to judge your credit-worthiness. Banks are trying to judge your ability to pay off a loan and how much you can afford to pay. If I loan you money, the bank asks, do you have the ability to pay the loan off in the agreed upon time?

By contrast, insurers look not at whether you can pay off a loan, but whether you do. Insurers take information from a credit report and develop a number, called an “insurance score.” They are not interested in whether you qualify for a credit card, but how you use that credit. How many open accounts do you have? Are you regularly adding more? Do you pay installments on time? Are these accounts at or near their limits? Have you filed for bankruptcy?

This insurance score is a measure of stability in your life. There is strong statistical evidence, based on years of analysis, that people with high insurance scores - that is, people with more stability in their lives - suffer fewer accidents. The opposite is also true. People with lower insurance scores as a group tend to file more insurance claims.

In our insurance system, which is regulated by individual states, drivers and homeowners who are higher insurance risks should pay more for insurance. Those who are lower risks should pay less. The use of credit, together with other rating factors such as the number of claims you’ve filed, where you live and drive, what kind of house or car you own and so on, helps insurance companies better determine the appropriate rate to charge.

At the same time, consumers need to understand that different insurance companies use credit in different ways. Some companies don’t use it at all, although most do. Many companies use credit when you first apply for insurance. You are initially grouped with people in similar situations and credit is not used again. Other companies, in some cases mandated by specific states, reapply insurance scores every year or two.

Consumers can have confidence that the application of credit information in insurance underwriting is done legally and confidentially. Consumers have a right to know if credit is being used and how it is being used.