Homeowners with shoddy credit pay 91% more on insurance than those with excellent credit.
Lenders use your credit score to determine if you qualify for a loan or other forms of credit, and now a new study by InsuranceQuotes.com reveals how much a similar score can impact the cost of your insurance. It’s called a credit-based insurance score.
Homeowners with an average credit score pay 29 percent more than those with sterling credit. And homeowners with poor credit shell out 50 percent more than those with great credit in 37 states including Washington D.C.
“This is another example of why credit is such an important part of your financial life,” said Laura Adams, a senior analyst with San Francisco-based InsuranceQuotes.com in a press release. “Maintaining a good credit history suggests that you’re a less risky customer and can lead to several hundred dollars in annual homeowner’s insurance savings.”
Credit-based score and home insurance rates
In most states your insurance rate will increase dramatically if your credit score plummets from excellent to poor. Here are a few examples:
- West Virginia – rate increase of 208 percent
- Virginia — 185.7 percent
- Ohio — 184.6 percent
- Montana — 176.3 percent
“Most people don’t know that insurers sometimes base their annual costs on credit scores,” says Gary Herman, president of Consolidated Credit. “But in actuality, 95 percent of auto insurers and 85 percent of home insurers use these scores in states that permit it.”
Finding out your credit-based insurance score
Unfortunately, you can’t be privy to the actual score an insurer will consider, because many insurance companies have their own proprietary scoring systems that they use. You can get rough estimates through many credit monitoring services, such as Credit Karma. However, remember that any scores you receive from services like this may not be 100% accurate.
Also keep in mind that some insurers view the credit-based insurance score as extremely important while others pay little attention to it. One thing for certain is that if you live in Maryland, Massachusetts or California the score won’t matter at all, because these states have banned it from being used.
How and why do insurers use credit-based insurance scores?
According to Fair Isaac Corporation (FICO), a company that calculates credit scores for consumers and lenders, there is a statistical link between a person’s credit and the probability of them filing for a claim. The lower the credit score, the higher the chance of filing.
The factors used to calculate this score are not dramatically different than a regular credit score. These factors may include:
- Your unpaid debt
- The amount of time you’ve had a credit history
- Payment history
- The amount of new credit you apply for
- Bankruptcies and collections
“Each factor counts for a certain percentage of your score,” notes Herman. “For example, your payment history counts for 35 percent. It tells the person looking at your score how often you’ve missed payments or were late on payments.”
Improving your score
Herman says the key to improving your score is paying your bills in a timely manner. Don’t be late or miss payments because that’s a sure way to reduce it. Other tips include:
- Don’t apply for new credit accounts
- Pay off your credit card balances or keep them as low as possible
- Comparison shop – if your score starts to rise but your rates stay the same check out other insurers and their costs
- Check your credit report at least once a year for errors. You can get your report for free at Annual Credit Report.com
“Basic financial practices will help you improve your scores,” says Herman. “Remember to budget and sharpen your strategies for saving. When you add these practices up, they can equal hundreds of dollars in savings.”