How Your Credit Score Affects Your Home Insurance Premium
A lot of things affect what we pay for house insurance. Most, we expect. If we live in a house balanced on stilts next to an eroding shoreline, we know we're going to be paying more than a suburban home in Ohio. If we file several claims a year, we know our rates will go up. But one area may be causing a significant rise in your rates without you realizing it. I'm speaking of our credit score.
While your credit rating shouldn't have a lot to do with the price we're paying monthly to insure our homes, it does. A bad credit rating tells our insurer that we're irresponsible, that we're high risk, that we have trouble paying back loans.
How are these credit reputations determined? By a process known as credit scoring. Your score is what your credit is at one particular point in time. It may have been higher, it may have been lower, but at the moment your credit report was calculated, your score acts as a snapshot of your financial health. Your credit report is calculated using a complex mathematical formula which weights certain factors like promptness, debt, and consistency. The number that comes out is a three digit number between zero and 999. The lower the number, the worse your credit. It doesn't matter if the low number was the result of identity theft or a bad few months when you were out of work—the number is all financial institutions need to make a judgment about your credit history.
The insurers rely on credit scoring to determine how much risk a potential candidate is. The lower their score, the more likely they are to file a claim, or so the logic goes. There are two main ways insurers use scores. The first is underwriting. Underwriting is when an insurer is deciding whether to issue a new policy, or to renew an old one. They weigh risk against benefit, and credit scores are a good predictor of risk.
The second way insurers use credit scores is in the rating system—and this is what determines your home premiums. Every insurer breaks an individual into uninsurable, high risk, average risk, and low risk. They analyze claims history, credit score, neighborhood demographics, sometimes even physical health, before determining what group to put you in. Those in the lowest tier get the lowest premiums. Those that are too high risk don't get insurance at all, and those in the high risk category get very high premiums. Though many states have now made it illegal for insurers to solely rely on credit scores to determine premiums, it's still a strong factor.
The best way to bring down your premiums is to get that credit score down low. Pay off debt, pay your credit cards on time, take out small loans and immediately pay them back. Do whatever it takes to bump up your credit score, and watch your premiums fall.
While your credit rating shouldn't have a lot to do with the price we're paying monthly to insure our homes, it does. A bad credit rating tells our insurer that we're irresponsible, that we're high risk, that we have trouble paying back loans.
How are these credit reputations determined? By a process known as credit scoring. Your score is what your credit is at one particular point in time. It may have been higher, it may have been lower, but at the moment your credit report was calculated, your score acts as a snapshot of your financial health. Your credit report is calculated using a complex mathematical formula which weights certain factors like promptness, debt, and consistency. The number that comes out is a three digit number between zero and 999. The lower the number, the worse your credit. It doesn't matter if the low number was the result of identity theft or a bad few months when you were out of work—the number is all financial institutions need to make a judgment about your credit history.
The insurers rely on credit scoring to determine how much risk a potential candidate is. The lower their score, the more likely they are to file a claim, or so the logic goes. There are two main ways insurers use scores. The first is underwriting. Underwriting is when an insurer is deciding whether to issue a new policy, or to renew an old one. They weigh risk against benefit, and credit scores are a good predictor of risk.
The second way insurers use credit scores is in the rating system—and this is what determines your home premiums. Every insurer breaks an individual into uninsurable, high risk, average risk, and low risk. They analyze claims history, credit score, neighborhood demographics, sometimes even physical health, before determining what group to put you in. Those in the lowest tier get the lowest premiums. Those that are too high risk don't get insurance at all, and those in the high risk category get very high premiums. Though many states have now made it illegal for insurers to solely rely on credit scores to determine premiums, it's still a strong factor.
The best way to bring down your premiums is to get that credit score down low. Pay off debt, pay your credit cards on time, take out small loans and immediately pay them back. Do whatever it takes to bump up your credit score, and watch your premiums fall.