Like it or not, our data, our lives are all captured in one way or another by companies who profit by telling others how our history with money, driving or health stacks up against others. When our ratings in these areas are high, we benefit and couldn’t be happier. When one or more of these records do not tell a great story, it can be more challenging to buy a car or a house or find an affordable insurance policy.
While insurance companies have increasingly developed sophisticated methods and algorithms to analyze our credit score and determine how it impacts risk, the reason credit scores are typically considered is pretty basic. A low credit score intuitively tells someone, correctly or not, that we don’t handle money particularly well. That could mean we might be late paying premiums or not pay them at all. That’s one reason it might make sense for insurers to take a peek at our scores, but there are others.
How does credit score affect your home insurance?
Credit-based insurance scores, first seen over twenty years ago, are much like typical credit scores used to qualify you for a mortgage. The score has been refined over time and now takes specific components of a person’s regular credit score and uses the information to predict how likely an applicant is to have an incurable loss.
The percentages below show how important certain factors are in influencing the final score:
- Payment history (40%): The most critical factor, this reflects how responsibly you pay off outstanding debt.
- Outstanding debt (30%): This shows if your credit is over-extended.
- Credit history length (15%): A more extended period of responsible money management is a plus.
- Pursuit of new credit (10%): Opening several new credit lines in a short period indicates risk.
- Credit mix (5%): A good mix of credit cards, car loans, mortgages and other loans is a positive indicator.
What is the difference between a FICO credit score and a credit-based insurance score?
Credit-based insurance scores differ from the everyday FICO score (named after its creator, the Fair Isaac Corporation) used for loans and credit card approvals. Different weight is given to the data used to establish each score, and each is used for different purposes.
While often considering the same credit report information, credit scores and credit-based insurance scores are not designed to do the same things. Credit scores are intended to do one thing — tell lenders the likelihood that you will repay a debt. Credit-based insurance scores predict the likelihood that you will file an insurance claim. Unlike a regular score, which is typically the sole or primary factor considered in approving a new credit card, for example, a credit-based insurance score is only one factor insurers use to assess a home insurance application. Many other factors play a role in the decision, including a history of claims and, of course, extensive details about the dwelling itself and its location.
Though you can only learn your credit-based insurance score by ordering a report from LexisNexis, you can make a pretty good guess from understanding your regular credit score, which it closely tracks. Credit scores range between 300 to 850, with most people’s scores falling between 600 and 750, and the higher your score, the lower risk you’re considered. Insurance scores aren’t the same, but they’re similar and generally rated on a comparable scale.
How does credit affect your insurance rates?
Although only one factor in setting premium rates for home insurance, data shows that the credit-based insurance score is an important one. The chart below shows the national average of annual home insurance rates based upon poor to excellent credit-based insurance scores.
Note that the rates don’t vary dramatically between average, good and excellent scores. However, a poor score, falling below 580 or so, does have a very significant impact on rates. As the chart shows, a home insurance rate for someone with a poor credit score can be almost three times as high as an applicant’s rate with an excellent credit score.
| Credit Score | Poor | Average | Good | Excellent |
|---|---|---|---|---|
| Rate | $2,870 | $1,433 | $1,312 | $1,125 |
We have also looked at these statistics for some of the leading home insurance companies. As might be expected, most home insurance companies’ rates follow a similar pattern to the overall averages above. Average, good and excellent credit scores don’t generate significantly different rates. Poor credit scores, however, push up rates significantly. Homeowners with very poor credit scores can have their rates more than double.
There are some notable exceptions to these patterns. Safety Home Insurance, a carrier serving several states in the northeast, doesn’t reflect credit scores in the rates it sets for home insurance policies. The premiums remain the same for any credit score. On the other end of the spectrum, Auto-Owners prices its home insurance so high ($26,185) for an applicant with a poor credit score that it is, for the most part, prohibitively expensive.
| Poor credit | Average credit | Good credit | Excellent credit | |
|---|---|---|---|---|
| Mercury | $881 | $634 | $614 | $568 |
| Farm Bureau | $916 | $669 | $619 | $520 |
| Safety | $1,151 | $1,151 | $1,151 | $1,151 |
| Progressive | $1,579 | $1,054 | $1,026 | $926 |
| Nationwide | $1,626 | $1,095 | $1,042 | $939 |
| USAA | $1,897 | $1,061 | $992 | $859 |
| American Family | $2,200 | $1,385 | $1,295 | $1,138 |
| Travelers | $2,420 | $1,422 | $1,269 | $1,094 |
| Allstate | $2,551 | $1,560 | $1,458 | $1,283 |
| MetLife | $2,633 | $1,388 | $1,252 | $1,026 |
| The Hartford | $2,745 | $1,689 | $1,609 | $1,528 |
| AAA | $3,074 | $1,382 | $1,263 | $1,078 |
| Chubb | $3,077 | $1,751 | $1,630 | $1,433 |
| State Farm | $3,263 | $1,708 | $1,503 | $1,165 |
| Erie | $3,521 | $1,062 | $897 | $725 |
| Amica | $3,764 | $2,805 | $2,644 | $2,321 |
| Farmers | $4,812 | $2,222 | $1,980 | $1,559 |
| The Hanover | $5,606 | $2,725 | $2,299 | $1,441 |
| Auto-Owners | $26,185 | $1,747 | $1,165 | $608 |
It’s important to note that some states do not allow insurance companies to use credit as a factor for determining rates, so it’s worth checking your state’s laws to see if you live in one.
How can you boost your credit score to lower your home insurance rates?
Your credit score can be an important factor when searching for affordable home insurance. A sustained but consistent effort can improve your credit history over time and positively impact your homeowners insurance rates. Some ways to improve your credit-based insurance score include:
- Order your full credit report.
- Check your report for mistakes and dispute them.
- Take charge of simple things, like paying household bills on time. If this is a challenge, set up automatic payments from your bank account.
- Similarly, pay your credit card balance on time each month.
- Try to avoid going over credit card limits.
- Ideally, you want to keep the total outstanding balance on all your credit cards below 10% of your total available balance for all of your credit cards. Even keeping this number below 30% will help.
Once you have improved your score, don’t hesitate to ask your home insurance company for a revised quote. This can usually be done online, but it is generally better to speak directly about this with a licensed insurance agent, as they will likely have more latitude to help you.
FAQ
Can I take on certain types of debt to help improve my credit score?
It is sometimes helpful, especially when first building your credit, to take out a small loan from your bank, if available. Paying this loan off quickly can give your credit score a nice boost. Building a healthy portfolio of credit cards (and paying each month) can improve credit but don’t go overboard. Seeking too much credit can be a sign of financial trouble.
Are there some insurance companies that don’t check credit scores when writing home insurance policies?
Yes. Some companies do not use credit scores. Cure Auto, a regional carrier in New Jersey and Pennsylvania, is one example. It is always important to ask an insurance agent about this and check with your state’s insurance commission. Also, shop around. Even companies that do use crest scores may have other ways of reducing your premium.
Do any states prohibit the use of credit scores in connection with home insurance?
Yes, a number of states don’t permit home insurance companies to use credit scores to set premiums, including California, Hawaii, Michigan and Maryland. While Massachusetts does not legally prohibit the use of credit scores, insurance regulators do not allow it. Check specifically with your state’s insurance commission because the legal landscape on this issue can change suddenly.
Methodology
Bankrate utilizes Quadrant Information Services to analyze 2021 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Quoted rates are based on 40-year-old male and female homeowners with a clean claim history and the following coverage limits:
- Coverage A, Dwelling: $250,000
- Coverage B, Other Structures: $25,000
- Coverage C, Personal Property: $125,000
- Coverage D, Loss of Use: $50,000
- Coverage E, Liability: $300,000
- Coverage F, Medical Payments: $1,000
The homeowners also have a $1,000 deductible and a separate wind and hail deductible (if required).
Rates were calculated based on the following insurance credit tiers assigned to our drivers: “poor, average, good (base), and excellent.” Insurance credit tiers factor in your official credit scores but are not dependent on that variable alone. The following states do not allow credit to be a factor in determining auto insurance rates: CA, HI, MA. Maryland factors a few credit-related variables in determining rates but does not weigh those factors the same as other states.
These are sample rates and should be used for comparative purposes only. Your quotes will differ.
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