Your home insurance company may be checking your credit score — are you okay with that if it saves you money?

Elaine Smith

ersmithwriter@gmail.com

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Concerned that her homeowner’s premium was too high, Karlee Roth, a nurse living in Tavistock, Ont., discussed her frustrations with her insurance agent in Stratford.

Greg Orr, an agent at Orr Insurance Brokers, said that it might be possible to get a better rate if she was willing to allow her insurer, Economical, to do a ‘soft’ check of her credit. Roth agreed.

“Greg said he would get me a new quote and I decided to get it all in writing,” Roth said. “He explained it in depth in a way I could understand, and based on having good credit, it seems that I got a better deal.”

Rick Orr, the broker who heads Orr Insurance, says that about a decade ago, insurance companies determined that “credit scores were an excellent indicator of risk. The home insurance files with the most losses were the ones with low credit scores. If people weren’t managing their money properly, they probably also were not replacing the roof when it was time and doing other preventive maintenance. They began providing discounts based on credit scores.”

In checking customer’s credit, home insurers used a soft credit check, rather than a hard one — something with which many homeowners were unfamiliar. They were certainly a revelation to Roth.

“I had no idea about soft credit checks; growing up, I was taught that if someone checked your credit, it was a mark against you when you applied for a mortgage.”

It was a teachable moment. Knowing the difference between soft and hard credit checks is important for all consumers, because they will encounter these checks throughout their lives.

Most consumers who use credit understand that they have a credit score or rating, based on various factors, such as whether they pay their bills on time and how large a credit balance they carry. The higher their score on the scale of 300 to 900, the better credit risk they are and the more likely they are to be able to obtain loans and mortgages.

Banks and other lending institutions use ‘hard’ credit checks before approving mortgages to evaluate the risk of lending to an individual. They contact a credit bureau to obtain a credit history and their inquiry remains on your credit record for at least two years, visible to anyone who requests your credit history. Too many hard checks in a short period of time can negatively affect your credit rating, because lenders may consider it a sign that you may not be able to pay your debts on time.

By contrast, a soft credit check gives the requester less information than a hard check and doesn’t affect your credit rating. The results of a soft check are only available to you and the party who made the inquiry. Landlords often conduct them and insurance companies use them in determining your premiums.

Unlike a hard check, though, a soft check may be done without your permission. However, the standard Habitational Insurance Application form contains a personal information section that gives the insurer permission to conduct a soft credit check once the application is signed. Most insurers consider that appropriate, but, said Orr, “A couple of insurance companies didn’t agree and felt that they needed to have informed consent, rather than expressed consent, to run a soft check. Only a few companies require informed consent.”

Whenever his firm gets a new customer, the agents explicitly ask if they can allow an insurer to do a soft check, and they do the same with insurance renewals. As with Roth’s account, his team also explains how a soft credit check works.

Anne-Marie Thomas, director of consumer and industry relations for the Insurance Bureau of Canada (IBC), notes that home insurers are required to follow the Code of Conduct for Insurers’ Use of Credit Information, approved in 2010 which “requires insurers to obtain a customer’s informed and express consent prior to collecting credit information.”

“When you complete an application for a financial product, you are entering into a contract,” Thomas said, “so you should read everything and understand it when signing. Many brokers will go through the application with you.”

Ken Whitehurst, executive director of the Consumers’ Council of Canada, believes the latter step is crucial.

“In principle, as a consumer organization, we believe there always needs to be clarity up front about what a consumer agrees to, and the onus should be on the seller to make sure they understand,” Whitehurst said.

Orr has a number of clients who don’t want insurers doing credit checks, even if the clients have good credit.

“It’s a privacy matter,” he said.

Luckily, says Thomas, the IBC code doesn’t allow home insurers to deny or cancel insurance if an applicant or policy holder’s credit score isn’t very good.

“You may not get the best rate, but no company can just willy-nilly deny you insurance,” Thomas said.

As for Roth, “I have good credit, so I wasn’t overly worried. It made sense to me to go ahead with a soft check; since it couldn’t negatively affect my credit score or my premium, I only saw a benefit to doing it.”

Article written by Elaine Smith  a Toronto-based writer and a freelance contributor for the Star. Reach her via email: ersmithwriter@gmail.com