Can bad credit = insurance problems? How insurance companies use your credit report.

You've just bought the home of your dreams. The next stop is to protect your purchase with insurance but, to your amazement, the insurance company has turned you down. You consider yourself a good risk: your new home, complete with an impressive security system, is located in a safe neighborhood. So why were you denied coverage? A poor credit report could be the culprit.

An increasing number of property and casualty insurers are using credit reports when deciding whether to grant a policy, renew an existing one or offer a preferred rate. Some insurers use credit reports as their sole deciding factor. These companies say that credit information helps them Spot insurance risks, allowing them to write more insurance than they would in the absence of credit reports. However, consumers who've never had a car accident or made a claim on their homeowner's policy could have a poor--or an erroneous--credit history used against them.

Credit reports contain identifying data (name, addresses, Social Security number and date of birth); trade lines (detailed information on credit cards and loans); inquiries (requests for credit history); and collection items (judgments, liens, collections and bankruptcies). Under the Fair Credit Reporting Act, credit reports can be ordered for: insurance underwriting, credit transactions, hiring (with your written permission), license eligibility or for a legitimate business purpose, such as verifying the credit worthiness of a potential business partner. Insurance companies don't have set standards for determining when to order a report. What one insurance company considers a bad credit report another might find acceptable. Other insurers use "scoring" models from Fair, Isaac & Co., a San Rafael, California, firm that reduces the data on a credit report to a single score.

The National Association of Insurance Commissioners, which wants this practice monitored, recently issued a white paper suggesting that insurers not be allowed to deny policies based solely on credit reports. It also recommends that the industry develop objective, verifiable guidelines for ordering credit reports.

How is a credit report used? Allstate, for example, uses credit reports in most states as one of their deciding factors. The insurer, which doesn't use income as a factor, orders reports for all new business, auto and property applicants. It denies an applicant only if there is serious evidence of financial instability within the past five years. It does not consider paid collections and accounts. "Unless there was some major financial trauma [i.e., bankruptcy or foreclosure] in a potential insuree's background, we will still consider their application," says spokesperson Raleigh Floyd.

If you suspect that your credit may lead to denied insurance, take the following steps:

1. Ask the insurer if it uses credit reports as a determining factor. If it does, order a copy of yours before you apply by calling the three credit reporting agencies: Equifax Credit Information Services (800-685-1111), Transunion Corp. (800-916-8800) and Experian (formerly TRW) 800-682-7654. The reports are free if you were recently denied credit.

2. When your report arrives, make sure it's accurate. If you find a mistake, request a correction from the credit bureau. The Fair Credit Reporting Act requires credit bureaus to resolve a consumer's dispute within 30 days.

3. If you've been denied insurance, appeal. If that too is unsatisfactory, ask the insurer to pUt the reason in writing. If you think you've been denied unjustly, complain to the state insurance department (the White Pages will list local offices).

4. Improve your credit report. Some credit unions and banks offer free or low-cost credit counseling. The government issues two free brochures: Build A Better Credit Record and Solving Credit Problems. To order, write: Consumer Response Center, Federal Trade Commission, 600 Pennsylvania Ave. NW, Washington, DC 20580; or call 202-326-3128; or visit the FTC's Web site at www.ftc.gov.