How Credit Scores Can Affect Homeowners Insurance Premiums

Insurance companies frequently use your credit history to determine the rates you pay for homeowners insurance. Insurers can generate your credit-based insurance (CBI) score by analyzing information about your past financial behavior, such as how frequently you've missed or made late bill payments and how much debt you have.

A CBI score is similar to a FICO credit score, but each insurer calculates it differently. It's also only one factor in determining your homeowners insurance rates. A bad credit history may have no effect on your homeowners insurance rates depending on the insurer and the state you live in, or it may more than double them. We discovered that having a good credit score could cut home insurance premiums by 20% or more.

What is a credit-based insurance score?

A CBI score, also known as an insurance score, is a number used by insurance companies to describe your overall credit stability. It's one of several factors that homeowners insurance companies may consider when deciding how much to charge you.

CBI scores are based on many factors, and the exact formula varies by insurer, but certain factors can affect your score positively or negatively.

Factors that positively affect your CBI score

• Long credit history
• Several bank and credit accounts in good standing
• No late payments
• Low credit usage

Factors that negatively affect your CBI score

• Collection of bank or credit accounts
• A large number of past-due accounts
• Extensive use of available credit
• Numerous recent applications for credit

In most cases, your previous credit performance, including whether you pay your bills on time, and the amount and types of outstanding debt you have are the two most important factors in determining your CBI score.

A $200,000 mortgage, for example, is treated very differently than a $200,000 credit card debt.

Why do homeowners insurance companies use CBI scores?

Insurers use CBI scores because there is a link between a person's insurance score and the likelihood of filing a homeowners insurance claim.

Essentially, your ability to maintain a high credit score is one way for the company to determine how risky you are to insure, as it is a very reliable indicator of how likely you are to make a claim and the size of that claim. A homeowner who is able to keep up with their monthly mortgage payments, for example, may be more likely to properly maintain their home and be more risk-averse overall.

As a result, insurers charge higher rates for homeowners insurance to people with poor credit histories because they are more likely to have higher loss ratios, while offering discounts to people with high CBI scores.

The differences between a credit-based insurance score and a FICO credit score

There are many similarities between a CBI score and a FICO credit score — in some cases, CBI scores are even referred to as "credit scores," which adds to the confusion. Your FICO credit score is a number that ranges from 300 to 850 and is used to determine how risky it is for a bank to lend you money or issue you a credit card.

A FICO credit score and a CBI credit score are both calculated using criteria such as how much debt you have, whether you pay off your credit cards on time, and the length of your credit history. The numbers for each are frequently provided by the same organizations, such as FICO.

There are, however, a few significant differences. In general, while banks and insurance companies use similar attributes about your financial history to predict your future behavior, the predictions they are attempting to make are not the same.

Insurance companies are primarily concerned with whether you are likely to file a claim, whereas lenders are concerned with whether you will repay them on time. In practice, this means that having a low credit score does not always imply that your CBI score will have a negative impact on your homeowners insurance rates.

Another distinction is that each homeowners insurance company calculates CBI scores using its own methods, so the specific elements used in each CBI score may differ. However, nearly all credit scores are calculated by one of the three major credit bureaus — Experian, Equifax, or TransUnion — and the techniques used by the bureaus are fairly consistent.

Does an insurance credit check impact your credit score?

One method used by credit and loan companies to check your credit — known as a "hard pull" — can have a negative impact on your credit score. Having an insurer check your credit history to determine your CBI score, on the other hand, will have no effect on your credit.

What is my credit-based insurance score? How does it affect my insurance rates?

You won't be able to find out your insurance credit score because home insurance companies use internal company models to calculate it. However, because a CBI score is largely based on a credit score, your credit report can provide insight into how it may affect your rates.

Credit scores range from 300 to 850, with the majority of people's scores falling between 600 and 750, and the higher your score, the lower risk you are considered.

Insurance scores aren't the same, but they're close and will be rated on a similar scale.

We analyzed a set of insurance rates and discovered that customers with good or excellent credit could save 20% or more on their base home insurance rates in some cases. Those with particularly poor insurance scores, on the other hand, may see their rates more than double, emphasizing the importance of improving your insurance score.

How your premium can be altered by higher and lower scores

Different insurers weight scores with unique methodologies and individual insurers may use different weightings depending on the state. Not all tiers use the same set of scores

In states where credit checks are legal, the vast majority of homeowners insurers conduct credit checks to generate CBI scores. So, if you want to find the best homeowners insurance rates, it's critical to keep a good credit score in order to get the best price from most home insurance companies.

However, insurers may grant relief to customers with poor credit who have experienced extraordinary life events.

Assume your credit score was harmed as a result of a catastrophic illness or the death of a family member. Home insurance companies will still run a credit check, but if you notify them of the event, they may be more lenient in their use of the insurance score.

How can you get cheap homeowners insurance with bad credit?

Nearly all major homeowners insurance companies consider your credit when determining what price to offer you for homeowners insurance; finding homeowners insurance without a credit check is extremely difficult. If you have bad credit, it will most likely affect the rates you are offered by an insurance company.

The good news is that it is extremely rare for an insurer to refuse to sell you a policy based solely on a poor CBI score. Furthermore, your CBI score is only one factor in determining your insurance rates.

If you don't have perfect credit but are meticulous about home maintenance and rarely file homeowners insurance claims, you may be able to get a low-cost policy.

Furthermore, in some states, insurance companies are required to notify you if your credit history has a negative impact on your insurance quote.

Another thing to keep in mind is that insurance companies in California, Maryland, and Massachusetts do not use credit scores to determine homeowners insurance premiums because the state governments have prohibited the practice. If you live in one of these states, you don't have to worry about your credit score affecting your costs.

However, if your poor credit has resulted in an expensive quote for homeowners insurance or if you have been rejected outright for coverage, you do have options for how to proceed. We recommend that you shop around for a better rate from an insurer and take steps to improve your CBI score.

Compare quotes from various insurers, some of which will be less expensive than others. Because each insurance company has its own formula for determining how your credit affects your homeowners insurance rates, you may receive a different quote based on your credit history.

For example, if you have a long credit history with a low number of late payments (a good thing), but also carry a large amount of credit card debt (a bad thing), you may find that different insurers weigh these variables differently and offer you prices to match.

It's also in your best interest to shop around on a regular basis to ensure you're always paying the lowest rates for your homeowners insurance, especially as your credit history changes over time. Remember that the type of check used to obtain an insurance credit check has no effect on your credit or CBI score, so don't be afraid to obtain quotes from multiple insurers.

Boost your credit score to lower your homeowners insurance rates

It takes time and effort, but working consistently to improve your credit history will have a consistent, positive impact on your homeowners insurance rates. Some suggestions for increasing your CBI score include:

• Paying your household bills on time.
• Paying your credit card balance – ideally in full – on time each month and staying within your credit limit.
• Think twice before opening new lines of credit, which can give the impression that you're overextending yourself in terms of credit.
• Examining your credit report (at sites such as annualcreditreport.com) and correcting any errors or discrepancies you find.

Again, your CBI and FICO credit scores are calculated differently, but the steps you take to improve each are largely the same.

In addition, while you cannot generally access your CBI score, you can obtain your credit report for free. If you are surprised by an expensive homeowners insurance quote due to a low credit score, you should request a credit report from a credit bureau. You're entitled to one free credit report from each of the major bureaus each year, and you might find an error or discrepancy that's causing your inflated rates.

If you discover an error, contact the company that prepared the credit report to have it corrected. Even if there aren't any mistakes, you can use the information to make an informed decision about how to improve your credit the most effectively.

Once you've improved your credit, whether by correcting an error or improving your credit habits, contact your homeowners insurance company for a new quote. Also, take advantage of this opportunity to shop around some more, as other insurers may be able to offer you even better rates.

Methodology

We obtained rates from three major insurers in Texas across 11 tiers to generate the differences in rates based on credit score. The rates were calculated for a $172,500 home built in 1987. The policy covered the entire cost of the house, as well as $100,000 in liability coverage and a $1,000 deductible.

Quadrant Information Systems provided the rates and credit tiers, which are based on insurer filings. Rates are provided solely for comparison purposes. Your rates will most likely differ.