Low Credit Scores Equal Higher Home Insurance Rates

The Credit Score Connection

Yes, in most states, low credit scores can indeed lead to higher home insurance rates. Insurance companies use what's called a "credit-based insurance score" to help determine your premiums. This practice, while controversial, is legal in 47 states, with only California, Hawaii, and Massachusetts prohibiting or significantly restricting the use of credit information in homeowners insurance pricing.

How Insurance Companies Use Credit Scores

Insurance companies don't use your actual credit score directly. Instead, they create a credit-based insurance score using elements from your credit report, including payment history, outstanding debt, length of credit history, new credit accounts, and types of credit used. Insurers argue that statistical data show a correlation between credit responsibility and the likelihood of filing insurance claims.

The Impact on Your Premiums

The difference in rates can be substantial. Homeowners with poor credit may pay 20% to 50% more for insurance compared to those with excellent credit, all other factors being equal. For someone paying $1,200 annually for home insurance, poor credit could add $240 to $600 to their yearly premium. The exact impact varies by insurance company, as each has its own proprietary scoring model and weighs credit differently.

Why Insurers Believe Credit Matters

Insurance companies maintain that credit-based insurance scores are predictive of future claims. Their research suggests that people with lower credit scores are more likely to file claims, particularly smaller claims. The theory is that individuals who manage credit responsibly also tend to maintain their homes better and make more thoughtful decisions about filing claims.

Improving Your Situation

If you have poor credit, focus on improving it over time by paying bills on time, reducing outstanding debt, and avoiding new credit inquiries. While credit improvements don't happen overnight, even modest improvements can lead to lower insurance rates at your next renewal.

Shopping Around Matters

Different insurance companies weigh credit scores differently in their pricing models. Some insurers are more forgiving of credit issues than others, making it crucial to shop around and compare quotes from multiple companies. Additionally, many insurers offer discounts that can help offset higher rates due to credit issues.

Conclusion

While low credit scores generally do result in higher home insurance rates, you're not powerless. By working to improve your credit score and shopping with multiple insurers, you can find more affordable coverage and potentially save hundreds of dollars annually on your homeowners insurance premiums.