Insurance Blog
How Do Credit Scores Affect My Homeowner’s Insurance Rates?
Insurance is a risky business! The insurance industry is built around forecasting risk. The actuaries use mathematics and statistics to predict risk which is where your credit score comes into play.
What is a credit score? It is simply an indicator by which businesses can gauge your ability to pay your debts on time. This score demonstrates your financial responsibility.
Insurance companies use credit-based insurance scores to predict how likely a potential insured is to file a claim. The larger the risk, the larger the premium will be.
Premiums are calculated using a formula, whereby the credit score factor is built into the algorithm to calculate the rates. If you have a low credit score, the corresponding factor applied to your premium will increase your payment amount. Likewise, if you have a good credit score, a discount percentage will be applied to your premium.
In addition to using your credit score, there are other determining factors involved in calculating homeowner’s insurance premiums. These factors include items such as occupation, education, location, and claims history, to name a few.
According to the Texas Department of Insurance, there are consumer protections in place regarding the use of credit and insurance scoring. Insurance Companies that use your credit report during their underwriting process must give you a disclosure statement that explains your rights. The information on your credit report cannot be the only factor the company considers when determining if they will cover you or what your homeowner’s insurance rates will be. In addition, insurance companies cannot refuse to insure you or increase your rates if your credit was damaged by divorce or unemployment.
Besides Insurance Companies, Who Else Can Use Your Credit Score During a Decision-Making Process?
Surprisingly, there are several industries that you may do business with that will review your credit score. Landlords, utility companies, employers and insurance companies all use credit reports to determine if someone is responsible and trustworthy. Landlords and utility companies use it to determine the amount of deposit or down payment or if a security deposit is needed at all.
What is the difference between your FICO score and your Insurance Score?
Most people know what a credit score is, but did you know that you have an insurance score as well? Both may factor into what you pay for homeowner’s coverage. An insurance credit score is derived from your credit history. Companies use the scores -- along with other factors -- to predict your potential of filing an insurance claim.
The following items shown on your credit report are considered:
- The number of loan or credit accounts you have open
- The total amount you owe for all open accounts
- History of late or non-payments
- How many years your oldest credit account has been open
- Number of inquiries into your credit history in recent months
It is important to note a common misconception regarding credit reports and the mortgage lending process. It is acceptable - actually, quite smart - to “shop around” for various insurance quotes during this time. The credit inquiries insurance companies make are not provided to mortgage lenders; therefore, they are not considered in lending decisions. The inquiries are treated the same way as inquiries for employment purposes, and they will not affect the mortgage process.
What if I have bad credit?
If you have a poor insurance score (as a result of less-favorable credit history) you are perceived as being a higher risk. High risk results in higher rates. However, be comforted in knowing that there are some insurance companies that do not rely solely on credit scores to calculate insurance rates. Buying a home can be an exciting, sometimes scary experience, but finding the best homeowner’s insurance for your new abode doesn’t have to be!
Here are some tips to help you prepare for finding a company and policy that meets both your coverage needs as well as your financial situation.
- Review your credit report carefully. Several websites offer to provide it to you for free or low cost.
- Take immediate steps to improve your credit score.
- Shop around! At PolicyPro, we are a one-stop-shop for all your insurance needs. With just a few clicks and minimal information from you, we can access multiple carriers for you to choose from. For a free, no-obligation quote, contact us today at policypro.com.
Boost Your Credit Score
Finally, let’s go over some steps you can take to better your credit score:
- Pay your bills on time. Make sure you pay them on or before the due date.
- Keep your credit card balances low.
- Resist using your credit cards.
- Pay off your debt. Try to pay it off rather than moving it to other cards.
Your premiums can vary from carrier to carrier. The good news is there are options available to you if you have less than stellar credit. PolicyPro can help you compare