Did you know that your credit score affects home insurance cost? It’s a common notion that a person unable to manage his or her finances is a relatively higher insurance liability, too. So, insurance companies usually offer home insurance coverage at a higher rate for people with a bad credit history.
What is a credit-based insurance score?
Insurance companies usually use your credit history to generate your insurance score or credit-based insurance score (CBI). This score is used to analyze your financial behavior and decide the premium you have to pay for the required coverage.
The exact formula to calculate your CBI can differ from one insurer to another. According to FICO, about 85% of insurers perform a credit check before offering homeowner’s insurance coverage.
The probability of a high-risk customer filing a claim is higher than a person with good credit. And, filing a claim means a loss for the insurance company. Therefore, an insurer usually charges a higher premium to a high-risk customer when offering homeowner’s insurance coverage.
This is the ground rule—the higher the score, the lower the risk of filing a claim. You may have to pay relatively less for your homeowner’s insurance coverage.
You can get an idea of how it works from this formula; If your credit score is 600 or above, you can save about 20% off the base home insurance or renter’s insurance policy. So before you opt for homeowner’s insurance coverage, check your credit report and score, and on its basis, negotiate with your insurer on the coverage price.
FICO score and credit-based insurance score: What is the difference?
Insurance scores and credit-based insurance scores are not the same. They depict two different things.
Your FICO score informs creditors how much of a creditworthy person you are. And, insurance scores or CBI, predict the likelihood of you filing a claim. However, insurance companies consider many other factors in deciding the premium cost.
Another difference between these two scores is that credit scores usually range from 300 to 850, whereas CBI ranges between 600 and 740.
How credit scores affect insurance rates
A report published by the insurance department of Arkansas indicates that about 57% of people have experienced a reduction in insurance premiums due to a good credit rating. In contrast, about 16% of people have experienced a price increase due to a poor credit rating. A poor credit rating can increase your home insurance premium cost up to 30%.
Here are the credit-based factors that can affect the price of your home insurance premium:
- Credit history: A longer time period of a good credit history is better.
- Bill payments: On-time credit card and other bill payments are favorable.
- Credit mix: A mix of several credit accounts in good standing is better.
- Credit utilization: Better if it is within 30%. However, a 5% ratio usually doesn’t help increase the score.
- Debts and other harmful factors: Huge outstanding debt balances and missed payments and collections can reduce your score. Judgments, foreclosures, liens, bankruptcies also have a negative impact.
- Credit applications: Multiple credit applications within a short period of time can decrease your score.
Your credit transactions are not the only factor insurance companies consider when deciding your premium. Here are a few other factors that influence the price you have to pay for coverage:
- Your property’s construction type
- Security and safety features installed in your home
- Any prior insurance claim
- The distance of your house from a fire station or fire hydrant
- Whether your house is well-maintained
What factors do not impact your premium?
You may think that income affects the price you have to pay for your home insurance policy. However, this is not true. Here are some other factors that do not influence your insurance premium:
- Employment history
- Marital status
- Child support arrangements
How to lower insurance rates despite bad credit
Usually, insurance companies do not decline insurance policies. Instead, they might just charge you a higher price. You can always negotiate a better coverage price once your credit rating improves.
Even if your credit rating is not that good, you can enjoy a lower home insurance premium if you meet specific qualifications. For example, you can get a relatively lower premium if you are a retiree or a veteran.
A great tip before concluding the article is—purchase multiple insurance policies from the same insurer. This will help you reduce the overall premium cost of your insurance policies through bundling.
Author Bio: Lyle Solomon is a licensed attorney in California. He has been affiliated with the law firms in California, Nevada, and Arizona since 1991. As the principal attorney of Oak View Law Group, he gives advice and writes articles to help people solve their financial problems.