This week, consumers can demand insurance companies use updated credit reports to determine premiums

Most of us understand the importance of maintaining a good credit score. It can make the difference in whether we’re approved for a loan, and impact the rate of interest we pay.

Many of us, however, are unaware that credit scores are used by nearly all insurance companies when calculating premiums for auto, home and other personal insurance products.

To protect consumers, the Maine Legislature in 2003 began to restrict how insurers use credit reports when underwriting their policies. For example, insurers cannot use credit scores as the only factor in determining rates. If credit scores are utilized, they must be factored together with other rating variables such as driving record, claim history, and, in the case of homeowners insurance, the type of housing construction.

Typically, credit-related information used by insurance companies to develop their “insurance score” and then set premium rates includes fairly minor issues like late payments and how often you apply for credit, as well as more significant credit events including defaults, liens and bankruptcies. These larger events are likely to affect your insurance score for several years.

Since some insurers use unique factors specifically tailored to the characteristics they consider most relevant, your insurance score could vary from company to company. Your insurance score will also differ from the credit score used by lenders. Even though similar information is considered when calculating the score, insurance companies interpret the information differently than lenders.

Maine law requires insurers to notify policyholders in writing when their credit score has contributed to an increase in premium. The written notice must describe up to four main issues that were factors in the premium increase. If you receive a notice, it’s wise to make sure the information is correct and then take steps to improve any issues that have reduced your score.

The Legislature recently changed the insurance credit scoring law to enable policyholders to have their insurance scores reviewed and recalculated annually.

Beginning Sept. 20, an insurance company using credit scores to underwrite or rate risks must obtain an updated credit report and recalculate the insurance score within 30 days of a policyholder’s request. The prior law only required a change if the company had based the score on incorrect information.

This law change will help consumers who have taken steps to improve their credit report. Those steps will now be rewarded through a better insurance score and possibly lower premium rates. It’s important to keep in mind, however, that if a policyholder asks to have his or her insurance score recalculated and the situation has worsened rather than improved, the insurance company may raise the premium rate.

What can be done to improve your credit score? Pay off credit card balances monthly or keep balances low, make sure to pay at least the minimum balance due every month and make payments on time. Late payments and insufficient payments will negatively affect a credit score.

New credit accounts should be limited. The immediate purchase discount offered at every department store to encourage customers to apply for the store’s credit card may sound appealing, but be aware that several applications for credit in a short period of time will usually lower your score. Canceling an older card is not necessarily a good trade for a new card, either, as an established card with a longer history is a positive factor.

Consumers should review their credit reports annually to verify the information.

Maine law requires credit bureaus to provide a free copy of their credit report annually upon request. This request can be made at www.annualcreditreport.com, or by completing a form obtained from the Maine Office of Consumer Credit Regulation, available at credit.maine.gov (click on the “free credit report” link).

More information about the use of credit scores and ways to improve your score can be requested from the Bureau of Insurance at 624-8475, or toll-free in Maine at 800-300-5000.

Eric Cioppa is acting superintendent of the Maine Bureau of Insurance, and Will Lund is director of the Office of Consumer Credit Regulation.