The Wide Reach of Your Credit Report
Your credit report, which is a compilation of your credit-related activities, plays a huge part in all of your financial activities that involve borrowing money. The credit scores derived from your credit report affect the interest rate offers that you receive on a loan or a credit card, as well as your ability to qualify for those credit sources in the first place. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Did you realize that the same information used to compile your credit score could also affect your homeowner's insurance premiums? In all but three states, it can. (California, Maryland, and Massachusetts do not allow credit to be considered when determining interest rates.)
According to a recent study by InsuranceQuotes.com, poor credit can raise your homeowner's insurance significantly. On average, if you have what is classified as fair credit, you will pay 36% more for your homeowner's insurance than you would if you had excellent credit. If your credit is classified as poor, the average annual premium increase rises to 114%. That’s more than double!
Where credit-based insurance scoring is allowed, premium increases for fair credit vary widely by state. They range from a 0.2% premium increase in North Carolina to a 75% increase in Arizona.
The difference is more pronounced when contrasting poor credit vs. excellent credit. Six states have increases of over 200%, led by South Dakota's increase of 288% (from $995 to $3861.30).
Credit-based insurance appears to be playing a larger role in assessing homeowner's premiums. The average difference in premiums between excellent and fair/poor credit has increased for the last three years in a row. Your credit score "can affect your life in terms of having everything be a little bit more expensive. So when it comes time to get insurance, maybe your insurance premiums will be... more expensive because you have a low credit score," says Millennial Money Expert Stefanie O'Connell.
Why do insurance companies use credit-based insurance scoring? For one simple reason — it works. Research has correlated credit-based insurance scores to the risk of a claim being filed and the amount of losses involved. As O'Connell explains, "Credit can be a measure of reliability, because it's one of the only ways that we really have to distill a person's reliability down to a single number."
Credit vs. Insurance Scoring
Although we normally refer to a single "credit score", there are many variations. Banks and credit card issuers may produce significantly different credit scores given the same information, depending on which scoring system algorithm is used. Each score is a product of which information is considered and how much weight each piece of information is given.
Insurance companies use information from your credit report in a similar fashion to establish their own metric — the credit-based insurance score. It is not the same as your credit score, because insurers and creditors place different levels of importance on different sets of information. However, insurance premiums and qualifications/interest rates on credit cards and loans have a major common thread: they are all based on risk assessment. The difference is in the timing and direction of cash flow.
Creditors assess how much money they can safely allow you to borrow based on the likelihood that you would be able to repay it; thus, your income and total debt load are factors in their decision. Insurance companies assess how much they will charge you upfront based on the likelihood they will have to pay out claims, factoring in the expected dollar value of those claims. They don't care about your income or debt load in the same way a lender would, because you pay an insurance company upfront before any coverage takes effect.
To set your rates, insurance companies are looking at your financial management patterns to assess responsible behavior. If you’re irresponsible with finances, the chances increase that you are also irresponsible regarding activities that would cause you to file a homeowner's claim, such as poor home maintenance causing eventual damage from neglect.
Insurance companies also care about the claims history of a property as well as the habits of the buyer. The claims history is covered in a separate report known as a Comprehensive Loss Underwriting Exchange (CLUE), which provides insight into past claims — anything from weather-related damage to theft/vandalism to fires and water damage.
Credit-based insurance scores are not based on CLUE reports, but both measures provide similar insights toward the same risk goal. Evidence of general irresponsible behavior and previous questionable claims will spell disaster for your premiums.
Even though you may never see your credit-based insurance score, you should assume that it is similar to your credit score — whether good or bad. To improve your situation, take the same steps you would normally take to raise your credit score, such as paying all of your bills on time, restraining debt load, and limiting the use of your credit cards. Eventually, your efforts should pay off in the form of lower homeowner's insurance rates.
If your homeowner's insurance premiums are outrageous and you can't wait until your credit score improves, consider shopping around for a new insurer. Similarly to lenders, insurers calculate their own credit-based insurance scores using their own weighting system to evaluate your risk factors. You may find a better deal even without a credit score increase.
Meanwhile, why not check your credit report to make sure that it contains accurate information? You could save money on interest and insurance premiums by doing nothing more than correcting reporting errors. If you believe there is a mistake on your credit report, you can resolve it with a single click using our credit correction service.