Aspects of 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, allow insurers to use credit scores when determining your home insurance premiums. Others such as California, Hawaii, Massachusetts, and Michigan specifically prohibit it.
Gaining insight into how credit scores affect home insurance rates can help you improve what insurers call your credit-based insurance (CBI) score, which may lead to lower premiums.
What is a credit-based insurance score?
A credit-based insurance score, or CBI, is a numerical score based on information from your credit report. This makes it similar to a credit score. Insurers rely on third-party CBIs, or insurance scores, and factor these into the calculations that lead to your annual premium.
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).
The difference between FICO and CBI scores
A FICO score is a conventional credit score used by lenders and other financial institutions that reflects how responsible you are with credit, both in terms of borrowing and paying loans.
Both CBI and FICO scores use information from your credit. But lenders don’t use CBI scores to make credit decisions. Instead, CBI scores represent information that’s important to insurance companies. By connecting certain details in your credit history to your insurance risk, your insurer gets an idea of the chances you’ll file claims and how severe those claims might be.
Why do insurers use credit scores?
Homeowners insurance companies use your credit history to determine your insurance score, and ultimately, a portion of 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. Someone who maintains their house is less likely to file a claim.
But insurers also use insurance scores because they can help reduce personal bias in the underwriting process. Every state has laws that prohibit insurance companies from discriminating against consumers. Before CBI scores were common, underwriters had to go with their gut if they didn’t have enough information about a homeowner. Insurance scores give underwriters an unbiased and objective way to determine if a risk should be written while minimizing the need for personal judgments.
Where can insurers use credit scores?
Only seven states prohibit insurers from using your credit history to help determine your insurance rates:
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California
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Hawaii
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Maryland
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Massachusetts
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Michigan
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Oregon
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Utah
Insurers in every state except the seven named above can use components from your credit history as a factor in setting your annual home insurance premiums. However, your insurance-based credit score is only one of many factors that impact your home insurance premium.
How to improve your credit scores
Because your insurance score is based on only a portion of your credit history, you may not see a substantial difference in your insurance score (or for that matter, your premium) if your credit score changes.
But your credit impacts many aspects of your financial life, including insurance, so it makes sense to keep your score as high as possible.
The first step is to understand what factors impact your credit score. This can vary a bit based on which credit bureau you're looking at, but these factors are typically considered:
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Length of credit history. A longer credit history is usually looked on favorably, but what’s considered “long” can vary by insurer.
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Bank and credit accounts. Having several accounts in good standing is usually a positive while any accounts in collections typically have a negative impact.
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Late payments. Fewer (or no) late payments is better for your insurance score.
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Credit mix. Insurance companies often evaluate the types of debt you carry, such as student, auto, and home loans.
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Credit applications. Applying for credit from multiple places can negatively impact your insurance score.
Other simple ways to improve your credit score include:
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Contesting inaccurate information on your credit report.
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Paying down revolving credit.
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Keep old credit accounts open, especially if they have a balance.
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Making a plan to pay off delinquent accounts.
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Paying your bills on time.
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Consolidating your debt for a better interest rate.
Does getting an insurance quote affect your credit score?
One final note about credit scores and home insurance: People often worry about the impact of hard inquiries, the times a lender checks their credit history, on 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 about a ding on your credit score.
