Little-Known Credit Score Has Big Impact on Home Insurance Rates

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Your credit scores don’t just play a role in the interest rates you get on loans. They can also affect your insurance rates — and that impact appears to be growing.

A particular type of credit score influenced homeowners insurance premiums to a larger degree last year, the most recent InsuranceQuotes study of the impact found. It’s called a “credit-based insurance score.”

The study found that, on average, Americans with a fair credit-based insurance score paid 36 percent more for home insurance in 2016 than Americans with excellent scores. That was up from the 32 percent more in 2015 and 29 percent more in 2014 found by previous studies.

Americans with a poor credit-based insurance score paid 114 percent more than Americans with excellent scores in 2016. That was up from 100 percent in 2015 and 91 percent in 2014.

As with other types of insurance, these increases vary from state to state. But the study report notes:

“… it would appear that insurers are placing an increasingly greater emphasis on credit-based insurance scores in setting homeowner premiums.”

What is a credit-based insurance score?

As we detailed earlier this year in “You Might Have ‘Hundreds’ of Credit Scores: Here’s How to Keep Them Rising,” entities use various credit scores for differing reasons.

Credit-based insurance scores are used by insurance companies to determine how likely folks are to file a claim, according to the study. The study is based on data from consumers’ credit reports maintained by the three national credit reporting agencies — Equifax, Experian and TransUnion). That data can include:

  • Outstanding debt
  • Length of credit history
  • Late payments
  • Collections
  • Bankruptcies
  • New applications for credit

Improving your credit-based insurance score

The InsuranceQuotes study emphasizes that insurance companies use credit-based insurance scores differently. So one insurer might give more weight to your credit history than another insurer.

Amy Bach, executive director of the consumer advocacy group United Policyholders, tells InsuranceQuotes:

“If you ask your insurance agent how they calculate your insurance-based credit score in figuring out your homeowner premium, he’s not going to have any idea. Nine times out of 10 they won’t have a clue what that algorithm is …”

Nonetheless, Lamont Boyd of credit scoring company Fair Isaac Corp., or FICO, tells InsuranceQuotes that improving your credit-based insurance score is not unlike improving more well-known credit scores. That means paying credit card bills on time and keeping your card balances low, for example.

Low balances are necessary for a good credit utilization ratio — the amount of money you owe compared with the amount of credit you have. As we explain in “Boost Your Credit Score Fast With These 7 Moves,” 30 percent of a FICO credit score is based on utilization ratio.

Check out that article for several ways to improve your utilization ratio.

How do you feel about insurance companies using your credit-based insurance score? Sound off below or on our Facebook page.

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