How your credit score affects homeowner's insurance

How your credit score affects homeowner’s insurance

A house purchase can be difficult for people with bad credit. If you are able to find a lender willing to lend you a mortgage, the interest rate you will get is likely higher than for someone with better credit. You could pay more for homeowners insurance.

NerdWallet’s rate analysis revealed that homeowners insurance costs would average $1,784 annually for someone with good credit. In most states, however, a person with poor credit will pay an average premium of $3142 per year, which is more than 76% higher.

Although each insurer will have its own definition of “good” or “poor credit, they are generally consistent with traditional credit scores. A good credit score is typically between 690-719. Below 630 is considered bad credit.

In California, Maryland, and Massachusetts, it is against the law to use credit to fix homeowners’, renters’, condo, and mobile home insurance rates.

How credit can affect home insurance rates

In order to assess risk, insurance companies use credit-based insurance scores since the 1990s. These scores can be used by companies to determine if they will sell you a policy or set your rates.

The credit-based insurance score works in the same way as a traditional credit score, but is weighted differently. Both score consider factors like how much debt you have, and whether you have made timely payments.

Insurers don’t use your credit history to determine your ability to pay premiums. This is unlike your mortgage lender or credit card issuer. They are trying to predict your likelihood of filing a claim. Research has shown that claim payouts are higher for those who have lower credit scores.

An increased chance of filing a claim can mean greater risk to the insurance company and higher rates for you.

Is it fair that credit history is used to determine home insurance rates?

Some consumer advocacy groups have voiced their disapproval of the use credit to set insurance rates. These organizations argue that this practice is unfairly impacting people of color who have lower credit scores than those of white people.

This racial gap has been made worse by the COVID-19 pandemic. According to a Harvard University study, minorities were more likely to lose their income or to have difficulty paying mortgage payments during the COVID-19 pandemic.

Some state insurance commissioners have taken steps to reduce the impact of credit on pricing in order to lessen the financial impact of the pandemic. In Nevada, for example, an insurer cannot raise your premium or deny coverage if you have a credit score that has changed after March 1, 2020.

The Washington insurance commissioner tried to put a three-year moratorium in place on the use of credit information to determine rates for homeowners, renters, and auto insurance. A judge later overturned the ban.

How to get homeowners insurance at a lower price

Compare rates. You can compare rates from different companies to get more affordable insurance. Online homeowners insurance quotes are available. You can also ask an agent to shop around for you. To ensure fair comparison, double-check that all quotes have similar coverage amounts.

Credit repair is a good idea. Long-term, improving credit can help you save hundreds of dollars per year on homeowners insurance. It can be beneficial to pay your bills on time, and use less of your credit. Find out how to restore your credit.

Ask about discounts. Ask your agent or insurer about home insurance discounts. You can save money by bundling multiple policies, such as homeowners and auto, or having protective devices like smoke detectors or burglar alarms.