CARES Act brings insurance consumers relief from credit scoring
Insurance companies have used various pieces of your credit information for years now to decide how much you pay for auto or homeowners insurance. This practice is called credit or “insurance” scoring.
Insurers use parts of your credit information — how many revolving credit accounts you have, how much you owe, and if any accounts are delinquent — to predict how risky you are to insure.
Your credit information, along with a number of other factors are put into a ‘black box’ that calculates a unique ‘insurance score’ for you and your family. This formula is considered proprietary by the insurance company. We know what items they’re looking at, but not how much weight is given to each.
Insurance Commissioner Mike Kreidler first heard about the practice of credit scoring back in 2000. He thought it was inherently unfair and worked for years to ban the practice. He did succeed in limiting its use in Washington state several years ago.
Property and casualty insurers argue that someone’s credit score is a good predictor of whether they will file claims in the future and that many people benefit from its use.
However, just like when the Great Recession hit, the coronavirus pandemic is leaving many people financially devastated and their credit scores likely soaring.
Congress recently passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to bring some relief. It may also help insurance consumers harmed by credit scoring, too.
That’s because while we’re battling this pandemic, creditors may not be able to share your credit information.
The CARES Act:
- Prohibits a creditor from reporting an individual’s delinquent payments to a credit reporting agency if the individual was up-to-date on their payments before the pandemic started.
- If asked, a creditor may also allow an individual to defer one or more payments, make a partial payment, or modify a loan or contract.
The 120-day duration of the moratorium took effect March 27 and is likely last until the federal government declares the national emergency is over.
So during this time, if you’ve lost your job or are struggling financially, you shouldn’t see your credit score go up.
Insurers will need to rely on the credit information provided by the credit reporting agency it uses at the time before the pandemic hit.
If you believe you a creditor is not following the CARES Act and is reporting derogatory credit information to a credit reporting agency, you should report it to the federal Consumer Financial Protection Bureau.
