How Credit Scores Can Affect Homeowners Insurance Premiums

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If you’ve ever applied for an auto, home or personal loan, you know that your credit score plays a big factor in what kind of interest rate you’ll pay and helps determine if you qualify for financing at all. But you may not realize that your credit score can also impact how much homeowners insurance companies can charge you for premiums. 

Credit-Based Insurance Scores

To calculate the probability that you’ll have an insurance claim/loss, insurers use what’s called a credit-based insurance (CBI) score. In use since the early 1990s, this rating is based entirely or partially on your credit information, gathered when an insurer conducts a “soft” credit check (which, thankfully, does not show up as an inquiry on your credit report). 

A preferred CBI score is usually above 760 and a poor score is below 600, according to the Insurance Information Institute. The actual score you are given will depend on the following factors, per the National Association of Insurance Commissioners:  

  • Payment history, indicating the timeliness of payments made on any outstanding debt (this represents up to 40% of your score) 
  • Unpaid debt, defined as the amount of money you currently owe to creditors (30% of your score)
  • Length of credit history, which is the duration of time you’ve had a line of credit in place (15%)
  • New credit history, indicating if/when you’ve recently applied for new lines of credit (10%)
  • Mix of credit, which represents the categories/types of credit you currently have, such as a mortgage, student loan, and credit cards (5%).

Other circumstances that can negatively affect your CBI score and insurance eligibility include problems with judgments, liens, bankruptcies, repossessions or foreclosures in the five years prior to your insurance application.

Rest assured that your CBI score is not calculated by using any of your personal data, including gender, age, race, income or vocation, marital status, residential location, employment history, rental commitments, family or child support arrangements, or your participation in credit counseling.

FICO reports that 85% of homeowners insurers and nearly 95% of auto insurers utilize CBI scoring data in states that legally permit it to be an underwriting or risk classification criterion. Currently, only Maryland, California and Massachusetts prohibit or severely restrict the use of credit in determining homeowners insurance rating decisions. In general, many states prohibit using CBISs as the solitary basis for denying, cancelling or not renewing policies, increasing premiums, and/or for rating or underwriting decisions. Insurers in several states are also mandated to contact policyholders or applicants when a CBI score results in a negative decision, such as a rate hike or policy denial.

Why Credit-Based Scores are Important

Why is your CBI score so important? Because the better your score, the lower your premium will likely be. Here we outline the four major steps that homeowners can take to improve their credit-based insurance scores

“Those with lower insurance credit scores usually submit more claims over the life of their policy and have a poorer payment history, leading to multiple late payments and cancellations for non-payment," says Eustace L. Greaves, Jr., an independent insurance agent and broker in Brooklyn, N.Y. "A good insurance credit score usually reflects how well the policyholder handles their finances. They tend to be more responsible about their finances, and this is reflected in how well they maintain their homes, thus submitting fewer claims created by the failure to perform basic maintenance in and around their homes."

Dr. Randy Padawer, consumer advocate for Lexington Law, a law firm in Salt Lake City, Utah, says nearly all the same factors that underlie credit scores for loan qualifications also form the basis for insurance scores. 

“For example, if you’ve been irresponsible with past obligations, this may suggest that you will treat the insurance company’s invoices in exactly the same way,” says Padawer. “Perhaps even more importantly, fairly or unfairly, this could also suggest something about your overall character. Because they’re guarding against frivolous claims, these companies want to minimize their contacts with those who look like they may be exploitative and irresponsible.”

The Pros and Cons of Credit Scoring

The practice of determining and using CBI scores is not without controversy. Critics contend that CBI scoring is unfair, especially to lower-earning and minority homeowners, and that a negative credit history shouldn’t affect the likelihood that your home will be damaged or robbed and result in you filing a claim. 

Alarmingly, a 2014 study conducted by Quadrant Information Services revealed that homeowners with poor or fair credit pay, respectively, 91% and 29% more, on average, for homeowners insurance than those with excellent credit.

Other studies, however, suggest that CBI scoring leads to lower rates for most homeowners. Consider recent data published by the Arkansas Insurance Department: Among more than 711,000 homeowners insurance policies written or renewed in 2014 that involved the use of credit as one of the factors contributing to the final premium, the use of credit information resulted in a decreased premium for over 57% of these policies versus an increased premium for only approximately 16% of the policies: hence, premium decreases outnumbered increases by a ratio of 3.66 to 1, and the premiums for roughly 84% of consumers were either discounted or not affected. 

“This is a good practice that benefits consumers,” says Alex Hageli, director, personal lines policy, Property Casualty Insurers Association of America, Chicago. “It should tell you something that only three states have legislatively banned or restricted the practice of using credit in underwriting decisions. Every other state allows it, for the most part.”

How to Improve Your CBI Score, Pay Less and Get Covered

Just as you can improve your FICO credit score to increase your chance of getting a lower interest rate and qualifying for a desired line of credit, you can improve your CBI score with careful planning. Here are some recommended steps to take: 

  • Pay your household bills on time.
  • Pay your credit card balance - ideally in full - and on time each month, and stay below your credit limits.
  • Think twice before opening up new lines of credit, which can look like you’re overextending yourself credit-wise.
  • Check your credit report (at sites like annualcreditreport.com) and resolve any errors or discrepancies you discover.

In addition, “don’t make frivolous insurance claims,” says Padawer. “And shop around occasionally. Nothing contributes to an inflated insurance premium like a lazy consumer who sticks with the same company for decades without taking the time to compare companies and rates.”

If your policy application is denied, if your coverage is cancelled, or your insurer chooses not to renew you based on your CBI score, you may still qualify for coverage through a preferred carrier, but will likely pay a higher premium for the privilege. 

“There are many companies that choose to not use credit scoring, although these companies tend, in many cases, to charge higher premiums or provide policies whose coverages are limited in several areas,” says Greaves, who cautions that it may be difficult to find such insurers.

Lastly, before choosing an insurer or renewing your policy, consider asking the company these questions:

  1. Do they use your credit to calculate your premium? If so, how?
  2. What other factors besides credit do they consider when deciding on your rates?
  3. What is your actual credit-based insurance numerical score, and how is this determined?
  4. How would they suggest you improve this score?
  5. If you are able to improve your score, will the company lower your premium at renewal?

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