Do credit scores affect home insurance costs?

While many consumers know their credit score can impact whether they qualify for a credit card or loan and what their interest rate will be, credit can affect another key part of your financial life: homeowners insurance. 

In states where it’s allowed, the vast majority of insurance companies use credit-based insurance scores to determine your risk profile, coverage eligibility, and policy cost. However, some states have laws banning credit as an insurance rating factor. 

Learn how your credit affects home insurance costs, whether credit is considered in your state, and tips to improve your score and save money on coverage. 

How credit impacts home insurance

Home insurance companies don’t directly use standard FICO credit scores. Instead, they calculate an insurance-based credit score to help determine if they want to insure you and how much your policy will cost (called your premium). 

Credit-based insurance scores are influenced by several factors related to your financial history, including:

• Homeownership history

• Past bankruptcies and foreclosures

• Payment history on accounts, such as loans and credit cards

• Length of credit history

• Recent credit inquiries

• The lines and types of credit you have open

• Total debt

While insurers can access a wide variety of information from your credit report to calculate your credit-based insurance score, there are certain pieces of information that, by law, they cannot use. Generally speaking, that includes your race, national origin, gender, age, income, and employment history. Other financial details like the interest rates on your debt and whether you’re enrolled in credit counseling cannot be considered, either.

Why credit affects insurance rates

The insurance business is fundamentally about managing and calculating risk. Just as an insurance company looks at a home's history (like past claims or damage) to figure out its risk, they also look at a homeowner's financial history (credit) to determine how risky you are to insure. This practice is based on studies that show a correlation between credit scores and claims filed: Consumers with lower credit scores tend to file more insurance claims. 

As a result, policyholders with low credit (630) may find themselves paying around $2,000 more per year in home insurance premiums than those with high credit scores (820), according to a recent study from the Consumer Federation of America (CFA). 

That being said, there are limitations. As mentioned, some states ban insurers from using credit at all. And even in states where it is allowed, a home insurer cannot charge you higher premiums if your low credit score is the result of:

• Major illness or injury

• Death of a spouse, child, or parent

• Temporary unemployment

• Recent divorce

• Identity theft 

States where credit can’t be used

Three states ban insurers from using credit as a home insurance rating factor:

• California

• Maryland

• Massachusetts

In Michigan and Oregon, insurance companies are limited in using credit, but it’s not banned entirely. 

How to improve your credit-based insurance score

You can improve your credit-based insurance score by improving your credit (in states where it matters). In general, there are five areas of finance that impact credit scores. Here are details about each and how to make improvements:

• Payment history: Paying on time is the most important behavior in terms of credit health. Late payments damage your score. The more consecutive on-time payments you make, the better your score will be.

• Credit utilization: Your credit score tends to dip as you use more of your credit limit. Generally, you want to keep your credit balances at 30% or less of your credit limits. And paying a credit card balance down to 10% or 20% of the card’s limit might give your score a boost.

• Average length of credit: Be cautious about closing old, unused credit cards (especially those without a balance or annual fee). Closing an old account shortens the overall average age of your credit history. Since the length of your credit history is a factor in calculating your credit score, shortening that history could cause your score to drop.

• Credit mix: Proof that you can handle multiple types of credit, such as loans and credit cards, is beneficial. That said, focus on managing the accounts you have responsibly rather than opening every possible type of credit just to boost your score.

• New credit: If you’ve opened multiple new credit accounts recently, creditors may see that as a sign that you need to rely on credit cards to make ends meet. Limit new applications, especially if you plan to seek a major loan (like a mortgage) or insurance soon.

Other rating factors insurers consider

Your credit history is just one of several factors home insurers use when determining your rates. Other factors include: 

• Location: Homes located more than 1,000 feet from a fire hydrant or fire station or those in regions prone to weather disasters, such as hurricanes or wildfires, may be more expensive to insure.

• Claims history: If you’ve filed home insurance claims in the past, or if the previous owner of a home you’re buying filed claims, your rates could be higher. 

• Home condition: Your insurer might charge you higher rates if your home’s roof or key systems — such as your electrical and plumbing systems — are old or in bad shape.

• Policy limits: If you opt for higher coverage limits or your property’s insured value goes up because of improvements or rising property values in your area, an insurer might raise your rates. 

Other factors that can affect your homeowners insurance rate include rising costs for construction materials and increased claims in other parts of your insurer’s coverage areas because of storms or disasters — even if they didn’t directly affect your home. The deductibles you choose for your policy matter, too. Typically, the higher the deductible, the lower the premium, and vice versa.