When J.R. Baker was shopping around for car insurance last year, he expected the insurance companies to check out his driving record and accident history. He didn’t expect them to demand his Social Security number.
The companies wanted Baker’s number so they could run a credit check on him, an increasingly common practice among auto insurers, who say it helps them identify the people more likely to be involved in accidents and file claims.
And the insurance industry is hardly alone in wanting to scope out your credit history. Employers run credit checks on applicants and workers. Phone companies typically check new customers’ credit histories before switching on their service. And landlords have for years required credit checks of potential tenants.
Indeed, consumer credit reports — originally developed to help merchants and lenders determine who deserved credit — gradually are turning into all-purpose measurements of personal responsibility and trustworthiness.
Allstate and State Farm are among those auto insurers that use credit information to help set premiums, or even determine whether an applicant should be covered at all.
“One company refused to even give me a quote until I gave them my Social Security number,” Baker said. The incident was one of several that prompted Baker, a Bainbridge Island, Wash., PR consultant, to sponsor an initiative to protect the privacy of personal information.
The widening use of credit histories and “credit scores,” while legal, unnerves privacy advocates. Their concerns are many: that the reports frequently contain errors; that certain non-financial information (such as name, address and Social Security number) is routinely resold to marketers; and that using credit history to make a hiring decision is just wrong.
“When you have a negative credit report, it can cost you a lot more than credit,” said Robert Ellis Smith, publisher of Privacy Journal, a Providence, R.I. newsletter that covers privacy issues. “It can cost you a job.”
Credit reports and privacy concerns are emerging as political issues.
A meeting of the National Association of Attorneys General in Seattle in June focused on privacy issues, including resale of personal information from credit reports and how such sales contribute to identity theft.
Credit reports are compiled by three national credit bureaus — Equifax, Experian and Trans Union — as well as regional companies. Businesses that grant you credit, from Visa and MasterCard to the corner gas station, report regularly to the bureaus on the status of your account.
Individual purchases aren’t recorded, but if you’re the type who runs cards up to the limit and pays only the monthly minimum, that will show up.
If you’ve fallen behind on the rent, your landlord can report that to the credit bureaus. So can utilities, hospitals and others owed money. Bankruptcies going back 10 years will be in the report, as will liens, overdrawn accounts, legal judgments and other debts going back seven years.
Just as important as the credit report itself is the credit score: a single number derived from your credit information that sums up your creditworthiness. Different firms have their own formulas, but one dominates the field: Fair, Isaac & Co. of San Rafael, Calif., progenitors of what has become known as the FICO score.
Chicago-based Trans Union plans to develop its own credit-scoring system, calculate and sell individual scores, and allow people to access their credit reports via a Web site.
Not just anyone can get your credit score or a full copy of your credit report. The Fair Credit Reporting Act, a federal law passed in 1970, generally limits access to lenders, employers, insurers or companies with whom you do business.
However, the credit bureaus earn millions of dollars by combing their databases for creditworthy people who fit certain criteria, then selling their names, addresses and Social Security numbers to marketers.
Employers often justify checking credit histories by citing the need to protect themselves from pilfering or embezzlement. Car insurers, for their part, say they know exactly what credit histories tell them about would-be customers. They point to research they say demonstrates a clear relationship between credit history and the likelihood of making an insurance claim.
Consumer advocates say the industry’s credit-report studies are flawed and that the practice of using credit histories can raise the cost of insurance for poor people. Robert Hunter of the Consumer Federation of America called it “a surrogate for redlining.”
Utilities and telecommunications companies are allowed to run credit checks, because their customers are billed for services they’ve already received.
There are numerous credit-scoring systems, but by far the most common is the FICO score developed by Fair, Isaacs and Co. More than 75 percent of mortgage loans, for example, are based in part on the borrower’s FICO score.
The score itself is a number between 300 and 900; the higher the number, generally, the better your credit rating. Different lenders, though, will interpret your score differently.
After years of guarding the scoring formula, Fair Isaacs recently unveiled the components. Here’s a quick rundown; you can read the complete explanation at www.fairisaac.com.
– 35 percent. Payment history. Have you paid bills on time?
– 30 percent. Amount owed. Factors include number and types of accounts, total credit line and distribution of debts among accounts.
– 15 percent. Length of credit history. Generally, longer is better.
– 10 percent. New credit. Applying for several accounts over a relatively short time likely will reduce your score.
– 10 percent. Credit mix. This refers to your combination of credit cards, installment loans, finance-company accounts and mortgage loans.
Consumer advocates say it’s a good idea to review your credit report regularly — say, once a year — to check for wrong information, correct any errors, see who’s inquired about your credit history, and make sure you haven’t been the unwitting victim of identity theft. It’s also a good idea to check your report before making a major purchase, such as a house or a car.
If you’ve been denied credit, insurance or a job because of information in a credit report, the company you applied to must tell you which credit bureau supplied the information. You’re entitled to a free copy of the report if you request it within 60 days of the denial notice. You also can get one free copy a year if you certify in writing that you’re unemployed and looking for a job, on welfare or that your report is inaccurate due to fraud. Otherwise, credit bureaus can charge up to $8.50 for a copy of your report.
There are only three big national companies. Smaller firms generally get most, if not all, of their data from one or more of the Big Three. They are:
– Equifax: P.O. Box 740241, Atlanta, Ga. 30374-0241; 800-685-1111; www.equifax.com.
– Experian (formerly TRW), P.O. Box 2002, Allen, Texas 75013; 888-397-3742); www.experian.com.
– Trans Union, P.O. Box 390, Springfield, Pa. 19064-0390; 800-916-8800; www.transunion.com.
For advice on correcting errors in your credit report, check out the Federal Trade Commission’s Web site at www.ftc.gov/bcp/conline/pubs/credit/crdtdis.htm.
