Homeowners Below a 580 Credit Score Pay 35% More for Home Insurance

15 Apr

While the odds of a major disaster hitting a specific home is the same regardless of whether the owner has a great credit score or one that puts them in a subprime category, their credit score will impact their rate in many states. 

In most states, insurers are allowed to consider credit scores when setting a homeowners insurance premium and if your score is not great, you may end up paying significantly more for coverage. 

According to insurance firm Matic, in states where credit scores are allowed to be considered, policyholders with a credit score below 580 pay 35% more on average for homeowners coverage than those with a score between 740 and 799. 

There are only a few states that restrict the use of credit scores when it comes to insurance pricing and while homeowners with bad credit still pay more for coverage, the gap is smaller, coming in at 15%.

When translated into dollars, according to Matic, the annual difference between premiums for homeowners with poor’ credit and those with very good credit runs $174 in states with restrictions and a much higher $496 in states that don’t restrict credit usage.

Why do insurers care about your credit?

Insurance companies love statistics and statistics show that policyholders with poor credit tend to file more claims which always leads to a higher premium.

A 2007 study done by the Federal Trade Commission found this to be statistically true but the reasons they file more claims is not well documented. Once explanation could be that homeowners who can afford to pay for damage out of pocket often do so, avoiding a claim and the premium increase that typically comes when you file a claim. 

Homeowners with poor credit scores may not be able to cover damages out of pocket, forcing them to file a claim and raising their rates. The rate increase after a claim runs between 17% to 29%, according to Insure.com.

How do insurers examine your credit?

Insurers look at a variety of factors when setting a premium and one of them is your credit-based insurance score. 

These scores are different than ones used by lenders, but they do contain much of the same information. An insurance score helps insurers determine how likely it is that you will file an insurance claim. 

Credit-based insurance scores use information in a consumers’ credit files which includes:

  • Payment history
  • Debt owed
  • Credit history length
  • Recent credit activity

These factors tend to be weighted differently by the various companies that offer credit-based insurance scoring so your rating can vary depending on which company is issuing the score. 

While an insurance score is slightly different than a credit score, improving either of them tends to require the same steps. Here are a few ways to up your credit or insurance score:

  • Pay your bills on time
  • Keep your credit utilization rate low
  • Only apply for credit when it is necessary
  • Monitor your credit score

Consumer groups call it unfair

Maryland became the first state to restrict credit scores in homeowners insurance pricing in 2002. California, Michigan, Massachusetts and Oregon, have followed suit. 

Consumer advocate groups argue that using credit scores when setting a premium punishes homeowners who can least afford it with higher premiums. Insurance companies on the other hand argue that considering credit scores allows them to examine a homeowners risk and set the appropriate premium for the risk they are shouldering. 

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