Why does credit score affect the cost of home insurance?
It’s no surprise that your credit history can affect your home loan, but a lot of people don’t realize that it can also affect the cost of home insurance. Of the many factors that go into determining your home insurance rate, credit isn’t the biggest, but it does have an impact.
Home insurance rates are based on risk, with insurance companies looking at every possible angle to determine the odds that a claim will be filed. Some of the risk factors are related to the area, like the frequency of storms or the crime rate. Others are individual, and credit score is one of them.
It's important to note that your credit score for insurance is not the same as the one that's used when you apply for a loan.
"The credit score you may be thinking of ﹘the one that represents your credit risk ﹘ is not what we’re discussing here. That’s your Fair Isaac Corporation Score (FICO). Instead, we’re looking at your insurance score, also called a credit-based insurance score (CBI)," Angel Conlin, chief insurance officer, Kin Insurance, says.
Statistically, people with bad credit tend to file more claims. That makes them a higher risk to insurance companies, and they’re charged a higher rate to make up for that risk. Insurance companies also see people with lower credit ratings as less likely to keep up with home maintenance and pay bills on time.
"Insurance companies connect certain details in your credit history to your insurance risk, and that gives them an idea of how likely you are to file a claim on your policy. Claims cost insurance companies money, and studies have shown people with high credit scores tend to file fewer claims," Conlin says.
The use of credit for insurance rating is a contentious issue. Some states have outlawed the use of credit for calculating home insurance rates. According to the National Conference of State Legislatures, those states are Alabama, Delaware, Florida, Illinois, New Mexico, Oklahoma, Texas, Vermont and Washington.
While Hawaii restricts the use of credit for auto insurance rating, it doesn't apply to home insurance. Some states have laws preventing credit from being used as the sole rating factor or as a reason to deny coverage. In these states it can still be used as a factor in home insurance rates.
Average home insurance rates by credit history
Here’s a look at how average home insurance rates for $300,000 in dwelling coverage, $300,000 liability, and a $1,000 deductible differ by credit tier, based on Insurance.com’s analysis.
| Credit tier | Average annual rate | $ increase from "excellent" |
|---|---|---|
| Excellent | $1,906 | - |
| Good | $2,275 | $369 |
| Fair | $2,750 | $844 |
| Poor | $4,400 | $2,494 |
As you can see, someone with poor credit will pay more than double what someone with excellent credit pays.
How to get cheap homeowners insurance with bad credit
If your credit score is affecting your home insurance rates, there are ways to save. Remember that it’s not the only thing that determines your rates; there are ways to get your rate down while you work on your credit.
Raise your deductible. If you’re on a budget, it can be frightening to see that big number, but it can make a big difference in your rates. Put some money aside instead every month to save just in case you do need to pay it, and if that day never comes, the money’s still in your pocket.
Look for discounts. The biggest discount you can qualify for is for bundling your auto and home insurance at the same company, but others are also available. Ask which home insurance discounts are available; don’t assume they’ll be automatically applied. Safety and security devices, paperless billing, and loyalty are a few common options.
Shop around. Don’t think you're out of luck just because one insurance company dings you for your credit. Each company weighs the various factors differently, so shopping around to compare quotes is your best bet for saving money.
How to improve your credit score to lower your home insurance rate
Improving your credit score can save you a lot of money, and not just on home insurance.
"Because your credit impacts so many aspects of your financial life, including insurance, it makes sense to keep your score as high as possible," Conlin says.
Follow these tips to bring up your score and bring down your rates.
Pay your bills on time. This applies especially to credit cards and other regular payments on your credit report. Set up automated payments, so you don’t forget to pay.
Pay down revolving credit. Your debt-to-credit ratio impacts your credit score, and the more you pay down debt, the better that ratio looks.
Check your credit report regularly. Errors on your credit report can be costly, and you won’t know unless you check your report for anything that looks off. You can check your credit for free three times a year, and many credit card companies also offer free regular checks.
Don’t apply for new credit often. When you apply for loans and credit cards, it shows up on your report. Called a “hard credit check” (insurance applications are “soft checks” that don’t affect your score), these checks suggest that you’re looking to borrow money, indicating potential financial trouble.
Frequently asked questions: Home insurance and credit
Are there home insurance companies that do not use credit scores?
Unless you live in a state where it’s illegal, it’s unlikely you will find a homeowners insurance company that does not check credit.
Can a home insurance company deny you coverage because of a credit check?
It’s not likely. An insurance company will decline coverage if the risk doesn’t meet its standards, and credit isn’t usually a big enough factor to result in a denial. If you’re denied, it’s likely there were other issues, such as the property’s condition or too many previous claims.
Helpful home insurance tools and calculators
