Do Credit Scores Affect Home Insurance Rates?

Mon Apr 25 2022

Closeup of a young woman enthusiastically checking her credit score on her laptop

Your credit score can affect your home insurance rate, but how that works varies by where you live and who your insurer is. Some states, such as Florida, use credit scores when determining your home insurance premiums. While most people understand that insurance companies use credit, the majority of people don’t know how or why companies use it. Gaining insight on this can help you improve what insurance companies call your credit-based insurance (CBI) score, leading to better rates.

How Does Your Credit Score Affect Your Home Insurance Rates?

Before we can explain how your credit score impacts your homeowners insurance premium, we have to define our terms. The credit score you may be thinking of ﹘the one that represents your credit risk ﹘ is not what we’re discussing here. That’s your Fair Isaac Corporation Score (FICO). Instead, we’re looking at your insurance score, also called a credit-based insurance score (CBI).

Both your FICO credit score and your CBI are based on information found in your credit report. However, insurance companies connect certain details in your credit history to your insurance risk, and that gives them an idea of how likely you are to file a claim on your policy.

Only seven states allow insurers to use your credit history to help determine your insurance rates:

  • California
  • Hawaii
  • Maryland
  • Massachusetts
  • Michigan
  • Oregon
  • Utah

You should note that your credit score is only one of many factors that impact your home insurance premium.

Factors That Impact Insurance Scores

Every insurance company has its own method for calculating your insurance score. However, most consider these factors:

  • Length of credit history. A longer credit history is usually looked on favorably, but what’s considered “long” can vary by insurer.
  • Bank and credit accounts. Having several accounts in good standing is usually a positive, but any accounts in collections typically have a negative impact.
  • Late payments. Fewer (or no) late payments is better for your insurance score.
  • Credit mix. Insurance companies often evaluate the types of debt you carry, such as student, auto, and home loans.
  • Credit applications. Applying for credit from multiple places can negatively impact your insurance score.

These are not the only details from your credit history that insurers may consider when determining your home insurance rates. Moreover, insurance companies weigh each component differently, so your CBI from one may not match what others assign to you.

Why Do Homeowners Insurance Companies Use Credit Scores?

Homeowners insurance companies use your credit history to determine your insurance score, and ultimately, your home insurance rates because they’ve found a correlation between creditworthiness and claims. By evaluating how a homeowner manages their finances, insurers can make reasonable calculations about how well the person takes care of their home. And when someone maintains their house, they’re less likely to file serious claims.

But you should also know that insurance scores help reduce personal bias in the underwriting process. Every state has laws the prohibit insurance companies discriminating against consumers. However, if an underwriter didn’t have enough information, they sometimes had to go with their gut. Insurance scores allow underwriters to identify bad risks while minimizing the need for personal judgements.

How to Improve Your Credit Scores

Because your credit impacts so many aspects of your financial life, including insurance, it makes sense to keep your score as high as possible. Some simple ways to improve your credit score include:

  • Contesting inaccurate information on your credit report.
  • Paying down revolving credit.
  • Keep old credit accounts open, especially if they have a balance.
  • Making a plan to pay off delinquent accounts.
  • Paying your bills on time.
  • Consolidating your debt for a better interest rate.

In general, you might not see much difference in your insurance score if you move from an average to a good credit score. But a poor credit score can have a big impact on your home insurance rates.

Getting Insurance Quotes Doesn’t Affect Your Credit Score

People often worry about hard inquiries, the times a lender checks their credit history, impacting their overall credit score. That’s not a problem with insurance quotes because insurers make a soft inquiry, much like a utility company might make. You can get an insurance quote anytime you want and not be concerned with your credit score getting dinged.