How credit scores affect homeowners insurance

It can be hard and costly for those with poor credit to buy a house. You’ll likely have a higher interest than someone with excellent credit once you’ve found a lender who’s willing and able to give you a mortgage. Homeowners insurance could cost you significantly more.

NerdWallet rates analysis showed that homeowners insurance would cost $1,784 on average for someone with excellent credit. However, in most states, people with poor credit will see an average premium increase of $3,142 annually — which is 76% more.

Each insurer has its own definitions for “good” and “poor” credit. However, these are generally within the traditional credit score ranges. A good credit score falls between 690 to 719. A score below 630 is considered poor credit.

California, Maryland, Massachusetts prohibit the use of credit to determine homeowners, renters, condo or mobile home insurance prices.

How credit impacts home insurance rates

Insurance companies have been using credit-based insurance scores ever since the 1990s to determine how risky an individual is to insure. These scores can be used to set rates for you or decide whether to offer you a policy.

Credit-based insurance scores are similar to traditional credit scores but weighted slightly differently. Both scores consider factors such as how much you owe and whether you’ve paid your bills on time.

Insurers aren’t using credit history, like your mortgage lender and credit card issuers, to assess your ability pay your premiums. They use your credit history to predict whether you will file a claim. Study after study has shown that claims payouts are more likely to be paid to those with lower credit scores.

Higher chances of you filing a claim will mean higher insurance company risk and therefore a higher rate.

Is it fair to use credit histories to set home-insurance rates?

Some consumer advocacy groups oppose the use of credit when setting insurance rates. They claim that it has an unfair effect on people of colour, who are more likely to have lower credit scores, than people of white.

This gap has been worsened by the COVID-19 epidemic. A Harvard University study found that minorities are more likely than other households to lose income and have trouble paying their mortgages during the pandemic.

A number of state insurance commissioners took measures to reduce credit’s role in pricing insurance in order to ease the financial consequences of the pandemic. Nevada is an example of this. An insurer cannot increase your premium, or deny you coverage, if your credit score has changed since March 1, 2020.

In Washington, an insurance commissioner tried to set a three year moratorium on credit information being used to set rates for auto, homeowners, or renters insurance. The ban was later overturned by a judge.

How to save money on homeowners insurance

Check around. Check rates from several companies to find the best insurance rate. You can either request quotes online for homeowners insurance or have an agent shop around on your behalf. Make sure that you compare the coverage and deductibles of all quotes to make sure you get a fair comparison.

Your credit score should be improved. Your credit score can save you hundreds of bucks a year on homeowner’s insurance. You can save money by paying your bills on-time and using less credit. Find out more about how to repair your credit.

Ask about discounts. To ensure you are receiving all home insurance discounts, check with your agent or insurer. Numerous carriers offer discounts if you combine multiple policies (such homeowners and auto), or have protection devices such as smoke detectors or alarms.

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How credit scores affect homeowners insurance