As you may already know, your credit scores plays an important role in your life. A new study has found, it has a significant role in what you pay for homeowners insurance too.
A July 2014 Quadrant Information Services conducted a study, commissioned by InsuranceQuotes.com. There they analyzed the average impact your credit-based insurance score has on your homeowner’s insurance premium.
The study found that if you have an decent (i.e., median) credit score, you may pay 29 percent more for home insurance on average than someone with exceptional credit.
But when you have bad credit, your premium almost doubles — your rate would rise by an average of 91 percent.
Many consumers are unaware their credit scores is being used this way to determine their policy premium in most states. Based on a 2007 survey conducted by a consumer advocacy organization called the Consumer Federation of America, only 57 percent of people surveyed were aware their credit score could change what they pay for home insurance.
What’s a credit-based insurance score?
According to Lamont Boyd, insurance underwriting expert at FICO, your credit-based insurance score is derived from a combination of factors in your credit reports and is used to help insurers better determine the likelihood you are going to file a claim in the future.
About 85 percent of home insurance companies and 95 percent of automobile insurers use credit-based insurance scores in states where it’s allowed but Maryland, California and Massachusetts are the only states that have banned the use of credit in establishing insurance rates.
Boyd says insurance companies began using credit-based insurance scoring when studies were conducted by FICO with insurance companies that showed a statistical correlation between a person’s credit and their likelihood of filing an insurance claim.
According to Boyd, “Insurers are aware that the way someone manages his / her credit correlates quite strongly to if they are going to have future homeowner losses.”
Your credit-based insurance score is made using the reports from each of the three major credit agencies; TransUnion, Experian and Equifax. The data will comprise of the following:
• Credit Score
• Outstanding Debt
• Length of Credit History
• Late Payments
• New applications for credit.
Based on Boyd, only about 35% hinges on whether you pay debts on-time and the next most impactful factor, has to do with how much debt you owe compared to what your limits of those debts are. This accounts for about 30% of the scoring model, and so the closer you are to being maxed out on your credit cards, the more negatively it will impact your score.
How is a credit-based insurance score used to establish insurance premiums for homes?
What’s tricky about credit-based insurance scores is there’s no standardization in how insurers use them. While a few may not consider your score to be important in setting a premium, most insurance companies will weigh it very heavily.
One other important factor to understand is, unlike your traditional credit score (which all consumers have access to) consumers don’t have access to their credit-based insurance reports.
Insurance companies are very guarded about how they use credit-based insurance scores to set rates, making it extremely difficult for consumers to find out how their credit affects what they pay for insurance.
In our study, we reviewed three grades of credit: good, fair and bad. How these grades impact your insurance premium varies from state to state. The reasons for this are straightforward. For one, not all insurance companies write policies in every state and secondly, insurers may discover that credit scores make a bigger difference in some states as opposed to others. These differences are the result of the “the competitive nature of the insurance market”, according to Boyd. Insurance companies want to write as many policies as they can. It’s just that simple.
If you live in Massachusetts, Maryland or California, your credit score doesn’t affect your insurance rate because all three states prohibit the usage of credit-based insurance scores in establishing premiums.
Florida has no ban written into law; yet, the study demonstrates no difference is made by credit. Instead, most insurers in Florida decide to not make use of credit-based insurance scores when pricing coverage. Florida law allows firms to work with credit history, but most don’t.
Insuring property in Florida is very expensive due to hurricanes and regular tropical storms, and based on a December 2013 NAIC homeowners report, homeowners insurance in Florida is currently twice as expensive making it the most costly state for home insurance in the nation.
Insurance Companies in Florida need to charge so much for insuring a home that personal credit rarely comes into play.
Opponents of credit-based insurance scoring
Since its start, credit-based insurance scoring has come under attack by many critics who believe using someone’s credit history to establish risk is insignificant and not fair. Others say it hurts low- to moderate-income earners, given that they are the ones with generally lower credit scores.
And while some admit there can be a statistically relevant connection between credit score and threat, the opponents to credit-based insurance scoring say the practice should be universally prohibited because it penalizes individuals for variables frequently beyond their control.
Still, others feel credit-based insurance scores are only a proxy for income and that since insurance companies typically prefer more wealthy customers, using credit as a standing factor may allow insurers to charge economically deprived consumers more for insurance. Of course this is only an opinion and is not backed by any found evidence.
How you can improve your credit-based insurance score
There are ways you can improve your credit-based insurance score exactly the same way that you can increase your routine credit rating.
Do the following:
• Pay all of your credit card debts and installment loans on time.
• Don’t start any new credit accounts unless it is an absolute necessity.
• Keep credit card balances as low as possible about 25 percent.
If for whatever reason your credit scores are climbing but your homeowner’s insurance isn’t dropping, it’s probably time to shop around because you will be able to find a less expensive policy.
If you have less than perfect credits then you are paying more for your home insurance policy. It’s one more thing to worry about during a flat job market and mounting bills is the additional stress that your credit is costing you more than it should to keep a roof over your family’s head.
You can hire us to take care of the entire credit restoration process for you. Call us today for your free no-obligation credit repair analysis.