A Poor Credit Score Increases Home Insurance Premiums

Personal credit score high have a huge impact on the home insurance premium we pay. In some scenarios it would even double the premium for anyone who has a poor credit compared to anyone else with an excellent credit score, warns insurance quotes company Insurance Quotes dot com.

For the third consecutive year the company commissions a Quadrant Information Services study which examines the average impact that anyone’s credit-based insurance score has on what the person is pays for home insurance.

The 2017 study found that insurance policyholders with a median credit score pay 36% higher premiums for home insurance than those who have an excellent credit. The InsuranceQuotes conducted the same survey in 2014 and 2015. 2014 recorded a 29% premiums’ increase while 2015 – 32%.

At the same time those with poor credit score could see more than a double increase in their premium, an average of 114% (up from 100% in 2015 and 91% in 2014).

InsuranceQuotes.com survey has also found out that the home insurance premiums vary in some states. For instance, South Dakota home owners with poor credit-based insurance scores for example will have to pay an average of 288% more for home insurance than those with an excellent score in the same state.

Other states, not displayed on the above graph, like Florida for example showed that a credit-based insurance score has less effect on the annual premiums. The Sunny State’s home owners with a poor credit-based insurance score will only pay an average of 26% more for home insurance than others with an excellent score.

InsuranceQuotes.com explains that there is not a single credit score. There are many and each one is used differently depending on the financial circumstance.

There are credit scores that measure people’s credit worthiness when they apply for a new credit card. But there are also other credit scores used to determine whether one should be approved for a mortgage. There are also credit scores that insurance companies use to help determine what one would need to pay for home insurance.

The Credit-based insurance score is a figure, derived from a combination of factors in anyone’s credit reports and is used to help insurers determine the likelihood of a home owner to file a future claim.

According to Lamont Boyd, an insurance underwriting expert at FICO, about 95% of U.S. home insurers use credit-based insurance scores in states where it’s allowed (California, Maryland and Massachusetts ban the use of credit in setting home insurance rates). Mr. Boyd explains that:

“Credit-based insurance scores are used by almost every insurance company in the nation because it’s a very good segmentation tool. It’s such a powerful tool because it is very, very predictive of future losses. In other words, lower scoring individuals typically have more insurance losses than those in the higher ranges, which means they are more expensive to insure.”

How Credit-based Insurance Score Is Calculated?

The insurance companies use credit-based insurance score data in different ways. It is possible that anyone’s credit history may play a more significant role with one insurance company than with another. The home owner’s credit-based insurance report is created using financial data collected by Equifax, Experian and TransUnion credit bureaus. The data may include outstanding debt, length of credit history, late payments, collections; bankruptcies and any  new applications for credit.

Lamont Boyd explains that he doesn’t “think anything in particular has changed other than the fact that more and more insurance company actuaries are better understanding the value of a credit-based insurance score in determining the overall pricing of homeowners’ policies”. He adds that “the bottom line though is this — if credit-based insurance scores weren’t predictive in helping insurance companies be more competitive, they wouldn’t be using them”.